Tuesday, October 17, 2017

Housing: Part 262 - Self-fulfilling prophecies are highly reliable.

From Calculated Risk:

"Usually near the end of a recession, residential investment picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.

However, following the 2007 recession, with the huge overhang of existing housing units, this key sector didn't participate for a few years."

I'm sure I'm a broken record on this, but it really is amazing how much power our priors have in what seem to us to be empirically derived conclusions.

If the overhang of existing housing units was inevitable, then the protracted recession was inevitable, and there was nothing to be done.  If the overhang of existing homes was a result of our resignation to contraction, and, in fact, our insistence upon it, then the protracted recession was collective self-immolation.

The existence of unsold inventory in 2007 or 2008 tells us nothing about which of those interpretations is correct.

There were millions of willing buyers for that inventory, and those willing buyers ran headlong into a national obsession with preventing them from doing so.  Would allowing that to happen have been a self-fulfilling prophecy, too?  Sure.  The fact that this nation overwhelmingly approves of the self-fulfilling prophecy we chose, even as it bankrupted so many of us, threw workers into unemployment, and destroyed the balance sheets of many young and middle class homeowners tells us just about everything we need to know about the mystery of our ailing economy.

The American populace, paraphrasing "A Few Good Men", barks, "Economic stability?! You can't handle economic stability!"


  1. This ^ is why I cannot read Calculated Risk without holding my nose. Sure, he has some great data series and graphs. But the conclusions he draws make absolutely NO sense. Keep up the great work Kevin.
    Chuck Erickson

  2. By my calcs, even if the "overhang" theory of too many housing units being built were true, the overhang was completely worked off by 2009. Yet since then we've "underbuilt" by a few million units. In fact, if we have a recession in the next 3 years, it might be the first US recession where housing construction doesn't drop as we continue to try to fill our unmet housing demand.