Will Housing Save the U.S. Economy? by Amir Sufi

Sufi has a short paper on this issue that is worth reading.

My bottom line is that we need to temper our optimism on what  a housing recovery can do for the U.S. economy. I agree that house prices will continue to rise and new residential construction will steadily increase from its current very low level. This is good news. But we will not be returning to the boom years that preceded the Great Recession. The days when housing was the predominant force driving economic activity are gone, and I view that as a good thing.

Sufi makes a number of points, including the following two. First, the days of numerous cash-out refis (and 40 cents of consumption for every dollar of it) don’t seem to be coming back.

sufi_fig2

Second, all-cash buyers and investors seem to be playing a sizable role in the housing recovery, which means that marginal homebuyers who have much higher MPCs aren’t. Instead, they are probably paying higher rents, not fueling a lot of consumption via cash-out refis.

sufi_fig4 He concludes:

I believe we have learned a painful lesson from the 2002 to 2012 experience. We cannot rely on debt-fueled collateral-based consumption for economic growth. Easy credit fueled house prices and consumption during the boom, and the collapse in spending was exacerbated by excessive debt burdens and a failure to provide any relief to underwater homeowners. Fueling consumption through easy household credit may help in the short-run, but it inevitably has long-run painful consequences.

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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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3 Responses to Will Housing Save the U.S. Economy? by Amir Sufi

  1. SUTM says:

    The only issue with what you’ve said is… exactly this is occuring at the moment with the QE programme. The question is whether its better to allow all sectors of society to get an uplift through housing than a select few that own financial assets.

    I’m interested in engineering aggregate demand and the mechanisms by which we can achieve it. I think supply side economics is dead in the water now.

  2. Lafayette says:

    Fueling consumption through easy household credit may help in the short-run, but it inevitably has long-run painful consequences.

    That’s an understatement if I’ve ever seen one.

    And if it is accurate in describing the precursor factor to the Great Recession of 2009, it still must be said that the mechanism in play was not economic even if the results were.

    The Great Recession of 2009 is replay of the Great Depression in many similar details. The stock market in 1929 crashed due to a feeding-frenzy, just like the Toxic Waste brought about the Credit Mechanism Seizure in the fall of 2008. And since America has become a Credit Economy, the impact was necessarily recessionary. There was no way to avoid it.

    But the real cause at the origin was fraud. The SubPrime Loans were unjustified and should never have passed stringent creditworthiness checks. But those verifications were not performed and loans were let nonetheless, so fraud was committed.

    And no one has been found guilty as of yet. The Banksters seem untouchable …

  3. Pingback: Remarkable! — shareholdersunite.com

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