“…the United States is still producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren’t working who would be if conditions were better.” Neil Irwin, senior economics correspondent, N.Y. Times, Aug. 4, 2014.
If the U.S. economy were a person, we’d characterize them as suffering from chronic malaise, interrupted by occasional bursts of vitality. In a recent N.Y. Times article subtitled “A Recovery in Need of a Recovery” (here), author, Neil Irwin, the paper’s senior economics correspondent, does an excellent job identifying and discussing those sectors of the economy in need of a Venti Americano, with a few extra shots of caffeine.
The article begins by examining:
“…how large a proportion of G.D.P. that various sectors have accounted for historically — over the two decades ending in 2013, to be precise. *** Then we multiplied those percentages by the Congressional Budget Office’s estimate of what the United States’ potential output was in the second quarter of this year. That gives us a sense of what output “should” be in each sector if we had a healthy economy and those historical proportions held.”
Following his analysis, Mr. Irwin concludes that as measured by historical GDP output compared to 2Q 2014, the two biggest laggards in holding back the economy are housing and the federal government:
…the shortfall in the economy is at base due to two sectors: residential construction–and here the Obama administration’s extraordinary unconcern with and unwillingness to fix housing finance must take the major part of the blame–and austerity both at the state and local and at the federal level. If we were to fix those two–housing and government–the economy would be fine right now, and the Federal Reserve would already have raised interest rates away from the zero nominal lower bound.
Hmmm. Fix housing and government…. While I agree wholeheartedly, from my perspective, one sector is the cause of the problem – government – while the other – housing – is the effect of the problem. Yes, as the author points out, we are building “far fewer houses than would be expected, given demographic trends….” but I suspect that is as much from fear – or lack of confidence in the future – as it is to anything else.
True, many folks are still stinging from the disastrous collapse of the real estate and credit markets in 2007/2008. But the fear today is due largely to an abiding belief that the light at the end of the tunnel is actually an approaching train. In other words, through government inaction, coupled with inane government action [see Dodd-Frank discussion below], many believe we’re stuck in an endless loop of “Groundhog Day.”
To disagree slightly with Mr. Irwin, I don’t believe housing has to be “fixed”; government needs to be fixed; then housing will rebound. Why? Because housing, both new construction and pre-owned, are collectively the nation’s best steroid. As goes housing, so goes the economy. With the purchase of homes comes the purchase of durable goods, e.g. furniture, furnishings, appliances, etc. Collectively, these indicia may cynically be called the “wealth effect” or more charitably, an expression of confidence in one’s future. Clearly, we ain’t there yet – not even close.
Today, in most of Oregon, housing is suffering from low inventory. For the past three months, May, June, and July, inventory in months[1] for the Portland-Metro area has been a stagnant 3.3 months. This is due to the lack of new construction coupled with many, many homes still queued up in the foreclosure line, awaiting a public sale,[2] and the short sale line, awaiting a private sale. And there is even a third category, “zombie homes,” left abandoned by the homeowner and ignored by the bank. Also, to a degree difficult to measure, is the concern by home sellers with equity, and home buyers with cash and availability to credit, that the future is still not bright enough to make a housing decision.
So, why the inaction and paralysis? What are the state and federal governments doing to either cause this, or to implicitly encourage it? Mr. Irwin points to “…the Obama administration’s extraordinary unconcern with and unwillingness to fix housing finance….” I’m not sure what he means by “fix housing finance.” Elsewhere, he points to the “breakdown in the credit channel,” and elsewhere “…the zero lower bound on nominal interest rates–and the failure to effectively summon either the Confidence Fairy to boost business desire to invest or the Inflation-Expectations Imp to reduce household and business desire to save.”
From my perspective, Mr. Irwin could have concluded his point by simply attributing the federal government’s problem to “…the Obama administration’s extraordinary unconcern.” It’s hard to be excited, motivated, and energized, when the chief executive isn’t – or when he’s on the links with the very people he publicly castigates as the “one-percenters,” a central theme of class-envy campaign.
I’m not sure about a “breakdown in credit,” if by that Mr. Irwin means credit availability. Banks are willing to loan; for some it is their lifeblood. The biggest problem in the government’s approach to housing is not inaction, but regulatory hyper-action bordering on abuse. Thanks to the Dodd-Frank Act, and the resultant creation of the Consumer Finance Protection Bureau, or “CFPB,” lenders, especially local and regional banks, are staggering under its regulatory fiat, making and interpreting rules on a daily basis. The result is that lenders have had to hire hundreds of employees just to read, understand and implement thousands of pages of rules.
The result is that out of an abundance of caution, banks have raised the credit bar, thus freezing many Americans out of the housing market. And for those that can qualify, the underwriting process has become the clinical equivalent of a proctology exam.
As for near-zero interest rates, I believe they can be both good [for those seeking credit] and bad [for retirees with savings growing at a snail’s pace]. Low rates are also fueling the stock market explosion today, since investors are chasing higher dividend returns, and to a lesser degree, risk. Whether that explosion is good or bad depends upon whether your fortunes are tied to Wall Street. For many with 401-K plans, Quantitative Easing or “QE” has been a God-send.
For those watching the Fed, many are holding their collective breath to see whether the reduction in bond buying [aka “Quantitative Easing”] will jolt interest rates and deflate the stock market by the end of this year. [It did so in May 2013, when Fed Chair Ben Bernanke hinted he would take his foot off the accelerator, and caused widespread swings in the market and a one-point jump in interest rates.] While there is disagreement on when QE should be concluded, I believe most observers would agree that it was necessary when large investment houses began to fail and the financial crisis erupted in 3Q 2008.
Conclusion. Pray for a complete housecleaning in the mid-term elections this November. The message should be that the federal bureaucracy – the only true growth industry today – needs to be reined in. Under the guise of consumer protection and income inequality, the federal government has actually sought to assure its own preservation by creating a cradle-to-grave bureaucracy that hampers lending, hampers business, and ultimately, hampers the American Spirit.
[1] Per the Regional Multiple Listing Service, or “RMLS™, “Inventory in Months is calculated by dividing the Active Residential Listings at the end of the month in question by the number of closed sales for that month. This includes proposed and under construction homes.”
[2] The Oregonian newspaper, incorrectly, in my opinion, reported recently that “foreclosure rates” were subsiding in the state. My statistics, derived from title company reports of actual foreclosure filings each month, show that rates are increasing. My blog will soon address this issue.
