The silver lining in the uneven housing recovery
Today in the Financial Times, Anjil Raval details how the housing recovery varies across the United States. Richer metropolitan areas are seeing much stronger housing price growth than lower income metro areas. This result isn’t surprising. Stories about overheating housing markets in cities such as San Francisco with its continuing tech boom seem to pop up every day. But other metro areas are having much different housing market experiences.
Housing is traditionally a driving force in economic recoveries, but the sector hasn’t been a major driver of this recovery. Raval argues that uneven employment and income trends in the current recovery are holding back overall housing growth. His argument appears to be right, but there is a silver lining in the slow housing recovery. We should consider the fact that the U.S. housing market is driven more by employment and income growth, instead of by subprime debt, a positive development.
Employment and wage growth became a more important driver of the housing market over the past year. Jared Kolko, chief economist at Trulia, the real estate website, finds a strong correlation between year-on-year growth in employment and year-on-year growth in housing prices. Metro areas including San Francisco, Austin, and Atlanta have all experienced strong wage and housing price growth. Whereas other cities, among them Baltimore and Little Rock, Arkansas, registered weak or negative growth in both areas. While employment growth doesn’t necessarily mean that wages are increasing, it is a good sign of a healthy labor market.
The connection between healthy labor markets and the housing market was quite different during the years leading up to the housing boom in the mid-2000s. In fact, the relationship was the exact opposite. Research by economists Atif Mian of Princeton University and Amir Sufi of the University of Chicago finds that a large amount of the increased mortgage credit from 2002 to 2006 went to zip codes with a lot of subprime mortgage borrowers and slower wages growth compared to the rest of the country. So instead of housing being tied to healthy labor markets, increased housing market activity instead was happening in areas with weak labor markets.
In short, more Americans were participating in the housing market, but the gains were unsustainable.
A more broad-based housing recovery would be a welcome addition to the slow but steady recovery from the Great Recession of 2007-2009, sparked of course by the collapse of the U.S. housing market. There may be a silver lining, then, in the current uneven gains in the labor market and the commensurate uneven housing market recovery. The gains may be uneven, but at least they come from employment and wage growth. The alternative is a financial system lending to households who aren’t seeing job gains or income growth.
A return to that situation would mean we really haven’t learned much from the experience of the past decade or so. The housing finance system is in need of reform, but we need to make sure that broader economic growth benefits all Americans in order to build a solid economic foundation.