The strong link between housing and recessions –

One of the best presentations at the Kansas City Fed Jackson Hole conference was presented by Ed Leamer of UCLA. Ed is a very thoughtful empiricist and has provided useful work in many areas of economics. His presentation is funny as well as insightful. Is premise is very simple. A decline in housing has preceded almost all of recessions in the United States.

Eight of the ten recessions were preceded by sustained and substantial problems in housing, and there was a more minor problem in housing prior to the 2001recession. The one clear exception was the 1953 recession, which commenced without problems from housing.

The following chart was part of the Leamer presentation. It shows the behavior of the housing market before a recession normalized. In most cases housing slowed before a recession. This is not the case for many other factors in the economy. The current decline is following the same pattern but is actually steeper.

His conclusion from this stylized fact is that a housing market decline will have spill-over to other markets and ultimately affect consumer spending. It is not a price problem but one of turn-over.

The reason housing is so important in recessions is that homes have a volume cycle, not a price cycle.

He provides a vivid and comical analogy. Men do not want to get a lower price than their neighbors and women fall in love with their homes and not willing to part with them at prices lower than expectations.

Housing hormones, both estrogen and testosterone, make owners very unwilling to sell into a weak market and that unwillingness tends to keep the prices of homes actually sold high while greatly reducing the volumes of homes sold. What we observe are not market prices but sellers’ prices.

His conclusion is that we are headed for a recession and the Fed helped the process with their past actions. Lowering short rates to below 1 percent was the ultimate teaser rate and that pushed a recession problem from 2003-04 to 2007-08. Of course actions today may avert a recession, but the Leamer story is compelling. The housing and credit issues are all tied together, but housing may be a more important driver for growth than the liquidity event of August.