News In Housing Economics Review

           Mike Bird, writing for the Wall Street Journal shares his take on housing prices and their relationship with financial instability. The article Heard on the Street: Perils of a Global Housing Boom, makes the case that recent rises in the price of homes since the financial crisis may be a symptom of broader financial instability and a leading indicator for the next recession. It was published on May 8th, 2021.

           The author points out that housing price expansion in the current cycle seems to be different from previous cycles. Noting that banks are less extended today than they were before the financial crisis. However, they were also far more “exposed” to the housing market than they historically should be. He points out that total bank lending went from about 30% in 1960 to 60% today. 

           The reason the author is primarily concerned is that he believes the middle class will suffer greatly if the housing market drops off a cliff. He also thinks it is important as an indicator of economic health since many well-established economists have produced research showing that increases in household debt tend to slow down economic growth. 

           The most positive aspect of this article is that the author is looking out for the middle class. I also think he made an important reference to Mian, Sufi, and Verner because their studies on household debt have produced very interesting results. They show a broader threat to the United States economy if we do not find a way to increase our productivity. 

           Where I think the article fails is the lack of mentioning quantitative easing. Specifically, their relevance concerning housing prices. Moreover, the fact that banks can still issue high amounts of bank loans without threatening to be overly “exposed” as the author puts it, may also be attributable in part to monetary policy.

           Overall, the article seems to me like a big miss. I chose it because I was surprised by how little economic context the author gave the story. His version of the story jumped around from anecdotal examples of how housing prices have been affected by policymakers in different countries but doesn’t very effectively make the case that housing prices are a massive existential threat to the broader economy like it seems to intend. Though the author may be correct that housing prices should still concern economists, he doesn’t make his case sufficiently. 

           The next article I will be reviewing is called Housing was the business cycle, posted July 18th, 2020. The article tells the story of the housing sector as a proxy for the business cycle. The story was written anonymously for the Economist. The article is based on a simple statement within the work of Edward Leamer from the University of California, Los Angeles. “Housing is the business cycle”, Leamer wrote in 2007. Since the financial crisis followed soon after its publishing, his work seemed to prove true. The author of this article seems to agree with Leamer, but believes the case is different this time around. 

           The article starts by showing the proof to Leamer’s argument, pointing out that residential investment can be used as an early indicator of a recession before output begins to fall. The author adds that serious housing troubles have “preceded nine of the previous 11 recessions”. 

           He notes later in the article that preceding the financial crisis, residential investment’s contribution to growth began declining two years before the recession. However, as a role in economic growth residential investment has declined gradually since its peak in 1950. He believes that the financial crisis is proof that declining residential investment is no longer as straightforward as it used to be as a leading indicator of recessions. 

           Despite public perception that housing was the primary cause of the financial crisis, it was not housing itself that was to blame, but the way that the housing sector affected the financial sector. The author cites research by a club called the Bank for International Settlements to support his claim that residential investment will no longer play such an important role in economic contractions in the future. He reasons that interest rates have played a direct role in increasing house prices in the past using a method that will be less capable of maintaining its effectiveness in years to come. The club found that “a one percentage point decline in short-term interest rates in America in 1970-2015 was associated with a 5% rise in house prices over the subsequent three years.” 

           To conclude this article in The Economist, the writer is clear that he or she does not believe this work to prove housing should be ignored going forward. Rather it will just have a diminished role in predicting recessions. Since the banks are more default-proof, and residential investment’s share of GDP is diminished, the reason to worry about housing now is the turmoil it will create in citizen’s lives if severe housing price instability causes foreclosures and evictions to ramp up according to the author.

           The positive aspects of this article are that it produces a counternarrative to the popular idea that housing is one of the most relevant sectors to focus on when predicting recessions. Further, it takes into consideration the effects of monetary policy which seems to be an important thing to consider with regards to housing prices in the last several decades. We have learned why this is true in this class and throughout our education in the economics department at Chico State. The Fed boosts home prices firstly through low interest rates which create low costs of borrowing leading to increased demand for home loans. Secondly, through open market operations like quantitative easing. Quantitative Easing is the monetary policy process whereby the Federal Reserve purchases bad assets from financial institutions to protect asset prices from dropping. This includes bad home mortgages owned by banks. This process then props up housing prices by creating an artificial demand channel.

           One negative aspect of the article is that it makes the point that monetary policy tools are reaching their economic effectiveness limit without addressing how current excesses will be prevented from falling through the floor when those tools are removed or rendered ineffective. Yes, the residential investment sector is small compared to the rest of the economy but as the author notes, the financial crisis was a “knock-on-effect” of housing problems and not as much a problem of the housing crisis itself. Though banks may not become insolvent if housing prices face a major downturn again, individuals in the economy will suffer greatly, and the knock-on effects of knocking so many people off of their stilts may have severe economic consequences that the author should have addressed. For one example, the labor force participation rate. We already have a homelessness crisis in America. I am not drawing any direct causation between the two, because I haven’t looked into it further, but the author should have considered how these things might affect economic growth in the future. The Economist does not indicate that Leamer’s work proves residential investment to be the only indicator of the housing sector’s overall effect on economic growth so it would be wise to consider what economic consequences may arise, outside of just residential investment’s contribution to GDP growth.

           The last article I am going to analyze is called Housing-Market Surge Is Making the Cheapest Homes the Hottest; Properties in long-neglected neighborhoods are attracting more interest, boosting revival efforts from the Wall Street Journal. It was written by Nate Smallwood and published on May 12th, 2021. 

           Housing is the focus of this article. Specifically, the effects of the COVID-19 pandemic on housing prices. The focal point of the article is how “the cheapest households” have benefited from the economic side effects of the pandemic. 

           The author claims that prices of houses have seen a 42% rise since 2018 in ZIP codes with a median home price at the time “less than $100,000”, citing a corporation called CoreLogic. He believes this is largely due to families giving up city life for suburbs. 

           Smallwood worries that this price appreciation won’t last. On the other hand, if prices continue to appreciate, that could exclude certain families, first-time buyers, and young people in general from buying a home. However, overall, he is optimistic. Citing community advocates and stating that previously economically downtrodden communities are seeing some promising signs of revitalization. 

           Prices are so low in places like Youngstown, Ohio that lenders won’t touch them according to the author. Because the houses need renovations and are not ready for sale, not to mention the costs of renovations, lenders find them too risky or are simply disinterested in the market. Fortunately, as a result of the pandemic, other types of money are making their way into these neighborhoods. 

           Private renovator individuals and companies sometimes consider these homes to be worthy investments if the price is right. By right I might exceptionally low. Smallwood cites one case of a general contractor named James Jordan Jr. who purchased a 3,000-dollar home and spent roughly 5,000 dollars on renovations fixing it up. He initially intended on flipping the home, but after he realized how much money he could save by living in the one he renovated he decided to move into it himself. He could have made a profit on the home presumably, but because of the location, it wouldn’t have been as much of a profit as he made selling the centrally located home that he lived in during the renovation process. 

           The case I just mentioned is not necessarily commonplace but is at least becoming increasingly possible according to the author. He reiterates how difficult it can be to get financing for these types of projects in these areas, calling it, “typically tough to get”. This is because not every case is like James’s. It’s hard enough to find any type of house with any value left in it for 3,000 dollars. Let alone, knowing how to fix up the place and being able to do it economically. Oftentimes people sink more money into buying, holding, and renovating these homes than they can expect to resell them for. Safety is another issue that comes to mind. James felt safe enough to move into that neighborhood himself but it’s not often that a neighborhood with a 3,000-dollar house in it can be found dissociated with things like crime. 

           Further on in the piece, Nate goes on about what he perceives to be externalities of the COVID-19 pandemic by pointing to an example in Detroit where The Detroit Land Bank Authority manages thousands of unsellable homes. They sold double the number of homes within three months this year as they did for all of last year. This was such a substantial improvement to the situation in Detroit that a plan to remove 300 broken homes was revoked. 

           This piece has some very insightful elements to it. Open-Economy Macroeconomics is all about what happens in so-called open economies. I think it is important to consider this type of phenomenon so the higher-ups in economics don’t forget to check their work and make sure the models can adapt. If they aren’t constantly testing the models, then I have to call this discipline an ideology more than social science. I am just getting my bachelor’s degree, but I intend to go into the field of politics, and I need to be honest with people. 

           I see real change in real people’s lives here and can’t help but wonder, is this why the federal government is still imposing top-down economic lockdowns on everyone? Why are we projecting over 6% growth after over a year of lockdowns? If standard established free-market thinking is applied this seems antithetical at least on its face. If you consider all of the government stimulus and monetary policy, I suppose it makes sense for now. However, shouldn’t economists be screaming from the rooftops warning about the potential for inflation or a severe economic contraction to occur as a result of the increase in the money supply? The M3 has gone up by roughly 3 trillion since the onset of the pandemic (Figure 2). M1 went from 4 trillion to 18 trillion and still no significant inflation (Figure 3). 

           At some point, people have to start spending their money again. When they do, will the effects on the money supply cause severe inflation? If so, the President should know about this, and he should be telling the people to save their money on targeted goods instead. We need politicians to be honest about their intentions. It seems clear to me that their intentions are not pandemic related, but economics related. 

           Unless the idea is that money can be added into circulation without consequence ad infinitum, it seems to me that lockdowns are a simple trick to curb inflation concerns. Inflation, or debt deflation? Must we not choose one if we open the economy? The savings rate is up so some people are spending less money compared to what they bring in than they have in the past (Figure 1). This is a good insulator for financial shock. Like, let’s say if the interest rate rises in response to inflation concerns.

           Housing is just yet another variable that seems to be an indicator that lockdowns are for economic reasons. The goal behind keeping us locked down relative to housing would be to have rich people from the city to move out into broken-down suburbs all across the economically decimated Midwest presumably. This seems like a good idea for sewing social cohesiveness and wealth and income redistribution throughout lower wealth and income areas. I am not criticizing the plan if it is the case that we are only locked down for economic reasons. I think it’s the wrong way to approach the problem, but I can understand the desperation of the situation. I just want to understand the truth behind it. 

           The downside to Smallwood’s article is that it leads to nowhere. It propagates the fact that the economic prosperity experienced by these lower-income areas is possibly linked to coronavirus side effects. However, it fails to conclude what will likely occur now that a reopening date has been announced. It also fails to offer enough detail as to why the coronavirus is causing such an influx of cash to these low-income areas. For what it does offer, it is unsourced speculation, though I agree that it is probably true. 

Analysis By: Justin Sherwood

The personal savings rate rose above 30% at one point and stayed above 10% ever since. this is the highest it’s been since the 1980s.

M3 rose roughly three trillion dollars since the onset of the pandemic.

M1 rose roughly 14 trillion since the pandemic began. over quadrupling the cash-based money supply.


“EXCHANGE — Heard on the Street: Perils of a Global Housing Boom — Home Prices around the World Keep Rising. That Could Spell Trouble for Financial Stability. – ProQuest.” 2021. 2021.

“Housing-Market Surge Is Making the Cheapest Homes the Hottest; Properties in Long-Neglected Neighborhoods Are Attracting More Interest, Boosting Revival Efforts – ProQuest.” 2021. 2021.

“M1 for the United States.” 2021. 2021.

“M3 for the United States.” 2021. 2021.

“Personal Saving Rate.” 2021. 2021.

‌The Economist. 2020. “Housing Was the Business Cycle.” The Economist. The Economist. July 18, 2020.