What is it about the new home construction market that arouses so much concern on the part of politicians, the financial media and government policymakers?
Part of the answer is that homebuilding is a major contributor to overall economic activity. About one-third of GDP originates in the residential construction sector, most of it tied to single-family dwellings. And home builders, realtors, and mortgage lenders are not shy when it comes to throwing their political weight around.
Concern also arises because housing has a highly cyclical history, leading both economic downturns and recoveries. My first major assignment as a Federal Reserve staffer in Washington in the 1970s was to work on a massive report to Congress on cyclical flucuations in the housing market. This was in response to a 23% decline in the late 1960s, the severity of which was exacerbated by government-imposed interest rate ceilings on savings deposits.
Finally, and most important historically, is the fixation on home ownership as a national objective. Enshrined in the Homestead Act of 1862 - 160 acres of federal land was yours after five years of continuous residence - owning property with a roof over your head became a symbol of success.
Lessons from the housing bubble. The chart above traces the rise and puncture of our recent housing bubble as well as two earlier, more modest cycles. What most commentators have failed to notice is that the current recovery in construction of apartment units (the bulk of 5-unit structures) has lifted activity in this sector back to its pre-recession highs. Starts of single-unit structures are running at no better than 50% of their pre-recession yearly average.
What the chart is trying to tell us is that the infatuation of the American public with homeownership has cooled dramatically. Housing as a debt-financed investment has lost its allure. Borrowing to buy McMansions with three car garages or more modest, sub-prime financed single family homes no longer makes economic sense. More and more people are focusing on housing as a service - a roof over their heads - rather than as a potentially lucrative investment.
For the younger generation, the wisdom of adding a hundred thousand dollars or more in mortgage debt to their outstanding student loans makes no sense, given the lessons to be drawn from the financial wreckage of the recent past. Renting makes eminent sense for such individuals.
Anybody Listening? Is anybody in Washington listening? Certainly few politicians are. They have yet to reform the two federal housing agencies, Fanny Mae and Freddy Mac, that underwrote, literally, much of the housing bubble. The new head of the Federal Housing Finance Agency is a liberal Democratic Congressman from North Carolina and considered by some an "affordable housing zealot." The move by Fanny and Freddy to re-activate a program that allows downpayments to be as little as 3% of a home's selling price suggests they are right.
Even the Federal Reserve appears to be ignoring the shift in underlying demand for rental housing. Apparent weakness in the housing market is a continuous subject for comment by Federal Reserve dignitaries and for mention in Open Market Committee statements. The possibility of a significant shift in favor of rental accomodation goes unmentioned. This, despite the fact that rents have increased twice as fast (3.3%) as the overall Consumer Price Index over the past year. And in urban areas, such as San Francisco and New York, they appear to have sky-rocketed, thanks in part to local ordnances.
"Less" means "more." As Friedrich Hayek might put it, the market is trying to bring to the attention of politicians and policymakers that relatively more people want to live in rental units than in the past.
A sensible housing policy at the federal, state, and local levels would start with the realization that we need less, not more government intervention. This would lead to fewer subsidized home mortgages, less zoning discrimination against the construction of rental units and fewer restrictions on the transfer of rental units. Sometimes "less" really does mean "more."