Housing Will Not Cause A Recession
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Earlier this week my Dad sent me an editorial from the Wall Street Journal. It is probably buried behind a paywall but the link is at the bottom of the page.
The most important point I got out of it was how small a part of our Gross National Product (GDP) housing is. According to this editorial housing is only 4.5 percent of the GDP.
Think about that and then hear that our booming export market (IE weak dollar) is 12 percent of the GDP. So the actual give and take of housing is not going to send the country into a tailspin unlike the thoughts of many in the blogosphere would think.
The biggest impact of the housing market in todays economy is the reaction of the politicians and bureaucrats. The recent cut in the interest rates combined with Washington’s support for housing is more about calming the populace and buying votes than sound economic policy.
So if you are thinking will send the nation into a recession, think again.
With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.
Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications. via WSJ.com.
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Comment by Paul on 31 January 2008:
I agree. It is mostly from credit card and such. However housing is still a major issue because if they will pay a house payment before anything else. So it adds to the cycle.
Comment by Corey on 31 January 2008:
I completely Disagree. Let’s take your GDP example. GDP is no longer a true reflection of our economy. Simply, because we have to import 80% of the raw materials need ed to produce our exportable products. The housing industry is not immune to this by any stretch. Think of all the raw materials that are needed to build a house. How many of those are imported from countries like China, etc?
Are housing market hasn’t just slowed, it is crashing. The housing issue is simply a symptom of a poor economy. Prices of homes are still high, because it takes that many dollars to purchase a house now. Due to the devaluation of the dollar itself.
A stuffy nose certainly makes it harder to breath.
Comment by Joe P on 31 January 2008:
Interesting at the end of 2006 I thought the housing market played a near 10% roll in our GDP. However there is more truth in an ever expanding consumer debt to income ratio that has been swelling for the last 10 years, housing was simpy a way for people to find more money to spend.
With bank failing to securitize their commercial and real estate debt- its puts their overall expossure at a very high level and dangerously close to insolvency. Was there recently a figure that also placed every dollar in circulation being leveraged about 27 times?
Comment by Real Estate South Africa on 1 February 2008:
Good article and good point. Let me give you an example of what’s happening in South Africa right now. Power shortages, increase in inflation, decrease in government power due to people not believing they’re capable of keeping South Africa going, interest rates sitting at 14.5%, house prices WAY higher than your average person can afford…
With the addition of the Credit Act they put in place 6 months ago which now gives people with bad credit 0.0% chance of getting a loan from any financial insitute.
BUT STILL our property prices rise, and for some reason they’re not dropping interest rates either. GO FIGURE
Comment by Larry Lang on 2 February 2008:
While it might only be a small part of GDP there are other facts to consider that are effected. The mortgage industry, home improvements, remodeling, purchases of new appliances, furniture. landscaping. pools, screens. The list goes on and on. When someone purchases a home the additional expenditures in other industries filter through the economy and effect many other sectors.
Larry Lang
View South Florida Homes at South Florida rentals and homes sales
Comment by david in norcal on 3 February 2008:
Wow, you have some mendacity.
Everywhere else where Housing is implicated in our economic fortunes they say because it relates to home related purchases and remodeling as well as construction jobs when the housing market is hot.
Of course, you just define it as “housing” alone and pretend that everybody else is stupid.
That’s straw man argument. Housing isn’t everything –but it affects nearly everything.
Furthermore, the disaster in Mortgage Backed Securities has harmed banks, lenders and nearly every investor in the past 6 months.
Seems like your post is too much good news to be true –sadly it is.
Comment by 1 year later on 29 January 2009:
You were saying…