July 29, 2013
Inspired by Noah Smith’s tweets, I thought I would give a quick response to Brad DeLong’s post arguing that better housing policy offers a quick way to fill much of the gap created by the collapse of the bubble. Brad has two contentions. First that years of very low building has led to huge pent-up demand for new housing units and second that if underwater homeowners could refinance their homes then we would see much more consumption.
Taking these in turn, Brad uses a trend line for housing construction to say that netting out the oversupply of the bubble years and the undersupply of more recent years, that we are way below trend. I would question the accuracy of the trend since the aging of the population might suggest a sharply lower rate of construction. (Also the increasing share of income going to medical care logically implies a decreasing share to everything else — presumably housing would be affected by this.)
Anyhow, we have direct data on the extent of over or underbuilding, the vacancy data compiled by the Census. This shows that vacancy rates are down from the peaks reached in 2009-2010, but still well above pre-bubble levels. That doesn’t sound like a market with lots of pent-up demand.
As far as the consumption story from allowing underwater homeowners to refinance and write-down debt, a little arithmetic would quickly destroy the illusions here. There are roughly 10 million underwater homeowners. Suppose they all refinanced tomorrow. How much more would they then consume?
The median income for homeowners is around $70,000. (I’m assuming that the average income for underwater homeowners is close to the median, meaning that it’s below the overall average.) Suppose that refinancing and coming above water allowed them to increase their annual consumption by $5,000 each on average, which would be a huge increase for a family with an income of $70k.
This would imply an increase in annual consumption of $50 billion. If we assume a multiplier of 1.5 that will add $75 billion, or a bit less than 0.5 percentage points, to annual GDP. This would be helpful, but not exactly a game-changer.
Long and short, we absolutely should have done more to help underwater homeowners as a matter of fairness, as I advocated from the beginning of the crisis. But it is unrealistic to imagine that this would have hugely altered the course of the recession.
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