Housing Is a Drag

Despite overall economic strength and conventional wisdom saying that housing should be soaring right now, it isn't. In fact, it's the biggest drag on the economy today.

Housing is key for both wealth and debt creation for most households, and plays an integral role in the overall economy; current paradoxical market conditions, writes senior economics correspondent for The New York Times Neil Irwin, are "at its core, an illustration of a fundamental rule in economics: If something can’t go on forever, it won’t." Home sellers are starting to realize that they won't make the same on their home's sale today that they may have back in the peak spring season, and buyers still think, despite increasingly prevalent list price discounts, that homes are too expensive.

Home prices are supposed to rise with incomes, but since 2012, the two factors have decoupled. Non-inflation-adjusted figures show that personal income per capita has grown 25 percent since the end of 2011, while the S&P/Case-Shiller national home price index grew 48 percent.

There is precedent for this, and it isn’t a happy one. In the last housing boom, new home sales peaked in July 2005, and home prices didn’t start declining until May 2006. It didn’t start to hurt the overall economy until December 2007, when the damage had spread through an overleveraged global financial system. But that doesn’t mean this episode has to end in tears. Home prices are not nearly as out of line with incomes as they were then; speculative activity hasn’t been nearly as frothy; and consumer debt levels are considerably more measured.

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