Slow Recovery? Blame the Housing Boom

Why has recovery been so weak and slow?

Businessweek argues: because we are still unwinding the consequences of the housing boom of the 2000s.

“It’s still a vicious cycle of foreclosures, prices falling, and buyers remaining on the sidelines,” says Jonathan Smoke, head of research for Hanley Wood, a housing data company. With the homeownership rate possibly headed to its pre-bubble level of 64 percent from 69 percent at the peak, Smoke calculates that the nation needs 1.6 million fewer homes that it now has. “We’ve gone through a period when we should have been tearing down houses,” he says. “The supply of total housing stock is beyond what is necessary.”

Scott Simon, a portfolio manager who heads real estate analysis for bond giant Pimco, says because this housing bust is so much worse than previous ones, it’s hard to tell when it will end. “There are all these things going on that we have never seen before,” he says. “No one knows how or what to model.”

Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity—they owe more on their mortgages than their homes are worth.

The conventions of political chat require us to debate the performance of the US economy as a function of something the president or the Congress did or didn't do. But actual market participants do not have to subscribe to that convention.

The slump we are experiencing remains much more the consequence of the business and regulatory decisions of prior decade than of the political choices of the current decade. (The benefits or harms of those decisions will likely not seriously show up until the next decade.)