Yglesias reflects on bubbles
Matt Yglesias is still trying to figure out the late housing bubble. His latest approach is to separate structures and land, which leads him to this conclusion:
I think it makes more sense to restrict the idea of a “bubble” to speculative asset like land (or stocks or gold or whatever) rather than to the actual building. A building boom may be (indeed probably is) in some sense “unsustainable” but when the boom collapses it’s not like an asset price bubble that leaves nothing in its wake but debt. A boom in structure building leaves you with extra structures. Whether or not this is the most useful thing to have on hand is open to debate, but it’s very much the opposite of “paper wealth” that vanishes when the boom fades. The buildings are still there, and still as useful (or useless) as they ever were.
This is not entirely wrong, but it’s not entirely right either.
While the major part of the movement in real estate value is accounted for by land, not structures, the contribution of building itself to the mid-decade expansion was prodigious. From the end of the recession in the fourth quarter of 2001 through the peak (or something close to it) of the bubble four years later, residential investment accounted for 13% of GDP growth, three times its share of GDP at the outset. Ubiquitous memes to the contrary, consumption contributed slightly less than its share (especially durable goods—so much for that boom in flat-screen TVs), as did nonresidential investment (from office buildings to capital equipment). Military spending contributed almost twice its share, but other categories of government spending were mostly in line with their averages.
In other words, residential investment—meaning the building of new houses and the renovation of old ones—was by far the leading sector in the familiar national income equation (income = consumption + investment + government + exports – imports). That’s not even counting spillovers—the boost to consumption provided by all those contractors, the demand for raw materials and equipment, and the rest. And a major reason people built and renovated so much housing is because prices were rising and were expected to continue doing so until the end of time.
Just as optimism about prices led to rampant overbuilding, now pessimism about prices is suppressing building. Residential investment is now about half its long-term average, and its failure to recover is a major factor in the broad economy’s failure to recover.
And yes, in theory all those new houses could be providing some use value—there are more than a few homeless and underhoused people in the USA who would happily move in tomorrow—but as long as people lack the money to buy or rent them (and banks are unwilling to lend the money to buy them), then they’re as good as useless. In fact, as long as they’re an overhang on the market, causing people to pull back from buying houses for fear that excess inventory will depress prices for years to come, then they’re worse than useless. Because under this delightful capitalist thing, it’s money that matters, as the great political economist Randy Newman once put it. Physical use values often take a distant back seat to the monetary imperative.
This economic system seems to underutilize a variety of things, from housing to people’s job skills.
RE: consumption. YOY consumption growth has been declining in the US for decades. It’s a misleading meme (not in this post, but in the larger media) to state that Americans spend more and are more wasteful then their Greatest Generation (Tm) elders. This is a key component of the scolding that working class Americans receive from the ruling class. The kernel of truth is that the American working class has gone deep in debt. But this is because of a collapse in disposable income, not because consumption has spiraled out of control.
What would be the solution to the lack of residential investment which makes this “recovery” atypical? Full employment with inflation? A clamping down on the financial sector? Cram-downs?
And if we succeed we would want to prevent the housing market from getting bubbly again. It seems as if the economy is set up to be bipolar: either its booming (for some) and bubbly or lackluster.
Excellent class analysis, Doug. I’ll share it on Facebook.
My unrefined take is that Y-guy has a point about housing being a value. Value (in this case housing) is the creation of socially necessary labour time. Price is supply and demand and land has no value but for the housing placed upon it. Owing land is like owning a piece of nature, the bastard child of private property, class society and the political State.
The supply of housing was pushed up during the FIRE boom and demand kept up with inflated price via speculative activity on the real estate market by the big finance capos and their little buddies in the yupfified, aspiring landlord class. When price is blown up way over its value and packaged into so and so many bloated financial assets e.g. cdos., you got the bursting bubble, GFC or whatever you want to call it messing with America herself and the rest of the world capitalists’ fictitious capital. The finance capos want their fictitious capital back in real values and reckon they can get it by imposing austerity on the worlds’ working class, the producers of socially necessary labour time and goods/services as saleable commodities.
“Razing houses, officials say, will increase competition for the remaining homes, driving up real estate values. That, in turn, will make it easier for homeowners to refinance to cheaper loans, freeing up spending and boosting consumer confidence. “It’s a matter of supply and demand,” says Dennis Roberts of the Cuyahoga Land Reutilization Corp., a quasi-government-controlled nonprofit, or land bank, that is overseeing the destruction of more than 645 homes in and around Cleveland.”
Housing isn’t for use; it’s for sale. If housing can’t be sold, you can’t house the homeless. That would be illegal, like feeding the homeless is illegal in certain places. Feeding the homeless and allowing the homeless to use homes to live in is not the purpose of housing or food. The purpose of food and housing is to sell it to make a profit. Same logic applies to the Earth. What good is the Earth except for buy and then, selling parts of it? If the Earth can’t be sold because of a rain forest or some other non-profit making impediment, then you have to destroy the rain forest until the land the forest is growing from can be sold to make a profit for its owners. Same for wage-slaves. If wage-slaves can’t be employed to make commodities which sell, don’t hire them and don’t give them a handout. Such human beings are useless and must find a place to sell their labour power elsewhere on the planet. “If they’d rather die they better do it now and decrease the surplus population. ….” Ebeneezer Scrooge
Structures depreciate more rapidly than land values appreciate. IOW, these houses aren’t worth much, especially the cheap, showy Toll Brothers McMansions. Land is the F150 drive train, the houses are the cup holders and leather trim.
Funny. Can you imagine the propoganda points scored by the Western press if the old Soviet Union had millions of empty houses in the desert while their cities were chocked with homeless?