It is is 10 years since the US subprime bubble began to burst, with disastrous results for the US and global economy.
The US Federal Reserve had created the bubble in the belief that higher house prices would boost the economy. It then made a bad situation into a disaster by refusing to accept that a bubble existed:
Alan Greenspan, then Chairman of the Fed, told Congress in June 2005, at the height of the bubble:
“Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications”
Ben Bernanke, Greenspan’s successor as Fed chairman, then continued to argue that there was “no housing bubble to go bust”
Yet US housing starts have never returned to the 2.0 – 2.3 million/year level seen between 2003 – 2006. Last month, they were just half this level at 1.1 million/year.
The Fed’s failure has had important implications for US housing policy. Both President Clinton and President Bush had focused on increasing home-ownership. When Clinton’s 67.5% target was reached in 2000, Bush was keen to achieve higher levels. But instead, as the chart shows, ownership peaked at 69.2% in 2005, and then began to collapse as the subprime bubble burst:
It is now back at 62.9%, equal to the lowest level seen since records began in 1965
The trend is clearly downwards, and so it seems likely the rate will fall to new lows later this year
Housing therefore represents an excellent example of the importance of demographics in driving demand, rather than monetary policy. Since 2008, the Fed has taken interest rates to their lowest level in history, and printed money at an extraordinary rate, in order to create consumer demand.
But it has completely failed to restore the housing market to its former levels, for the simple reason that demand patterns are driven by issues of lifestyle and affordability – rather than just interest rates. As the second chart shows, housing starts have not only halved since their 2006 peak, but the type of homes being built has changed quite dramatically:
Today’s Millennials are not following their Boomer parents in wanting to buy McMansions in the suburbs
They have much higher debt levels due to the cost of tuition fees, and they are having fewer children
The recovery in house prices fostered by Fed policy has also reduced their ability to buy single homes
The Boomers themselves are also no longer so keen on suburban living, and prefer to be town/city-based
As a result, over a third of all new homes are multi-unit – twice the level seen in the boom years of 1990 – 2007
A new study from Corelogic confirms that affordability issues also impact existing homeowners:
Homeowners making moves out of state are increasingly selling out of expensive markets like California, where price escalation is steep, and buying into lower-cost markets such as Texas and Arizona. Overall between 2000 and 2015, 2.5 home sellers left California for every out-of-state buyer coming into the state”.
The US housing market thus confirms the profound changes taking place in Western demand patterns. It also highlights the risk of believing that the Fed is able to guide developments in its preferred direction. Or, indeed, of believing that the Fed has a good grasp of what is actually happening in the real economy.