This week’s news was full of stories about residential house construction statistics (example). I’m wondering why we should pay attention to these numbers.
Suppose that an American has a job. He or she is likely to pay for a place to live or a portion of a place to live. Suppose that an American does not have a job or pension. It is unlikely that such a person is paying rent or a mortgage. He or she is probably living with a parent, spouse, or other relative.
If we accept these premises as true, we should be able to predict the number of houses being paid for in the U.S. by looking at employment statistics. If more people have jobs, more mortgage and lease payments will be made. In looking at house construction we would start by looking at employment growth (if any), the number of houses that are so decrepit as to be unmaintainable, and the number of people moving from towns where factories have closed to towns where factories have opened.
I can understand why an architect or builder would be interested in watching these numbers, but I don’t understand why the rest of us would want to. Won’t the number of houses eventually track the number of people with jobs? If so, why not simply watch the number of jobs?
[I understand that one argument economists might make for paying attention to housing is that the government throwing subsidies at the housing market (tax credits, mortgage interest deductions, federal mortgage guarantees, etc.) will cause people to be hired in the construction trades. Those new workers will spend money, magically creating economic expansion. It seems obvious that this strategy cannot work. If more and better houses created sustainable wealth, a poor country could become rich by having 100 percent of its citizens engaged in building fancy houses for each other.]
I sold a home last March and bought a home in April. I have been paying attention to housing and job numbers, mainly along the same rationale you have laid out. This coming spring I will be in the same situation. The questions for me are about local employment and housing numbers, but I’ll take what I can get. Basically, my working hypothesis is that the housing market will lag the job market: as more people loose jobs, they’ll hold onto their houses as long as they can, but those houses will eventually end up on the market. As people regain jobs, they have to establish some degree of creditworthiness (or so I hear), but they won’t be eligible for as much house on the day they start work as they will be after six months or a year of steady wages. So as long as the unemployment rate is rising, and of course while watching housing numbers, I will try to sell *before* buying. If unemployment is in decline for six months to a year, then I’ll probably be expecting to try to buy before selling. Local market situations win, of course.
You’re not allowing for two or more people with jobs sharing a home, people who are temporarily jobless paying their rent or mortgage out of savings, people with second homes, retired people who have homes, and so on. There’s very poor correlation between people with jobs and houses.
Mike: I did not say the relationship was 1:1, only that there would be a roughly constant correlation between jobs and houses. The number of houses is therefore not any kind of independent indicator of economic health.
Perhaps they are interesting as the economy is generally many niche areas, with few markets that are fairly simple to understand making up any sizable proportion. Real estate is a biggish chunk that is understandable. Real estate also is debt bought, even good mortgage risks are usually 80% financed, so bubbles in real estate will have an effect on the banking sector.
The combo of “everyone can relate” to houses, “one of the few significant, simple markets”, and “real estate mistakes means future credit problems” means that the housing market is somewhat interesting. To the extent that people will systematically buy houses they cannot afford and that bankers systematically give them loans to do so there will be interesting times ahead. In terms of employment it should not be interesting, as current employment figures capture that better as you point out, but in terms of future effects it can be be interesting.
>>If more and better houses created sustainable wealth, a poor country could >>become rich by having 100 percent of its citizens engaged in building fancy >>houses for each other.
Phil,
Your argument here seems to make sense. But by extension, can’t we apply this to all growth that comes out of consumer demand for goods and sevices? (Fill in the blank – “If more and better … created sustainable wealth, a poor country could become rich by having 100 percent of its citizens engaged in building fancy … for each other.” – fill in with any of [IPods|social networking web sites|more efficient microchips|medical care]) – so which of these actually DO make a por country rich?