The Engine of American Prosperity Still Sputters

There’s a debate among pundits about how much the American economy has really recovered from the 2008 recession. On the one hand, we’ve had eight years of a nearly uninterrupted fall in unemployment and rise in stock prices. On the other hand, wage growth remains lackluster, GDP growth is steady but slow, and labor participation continues a multi-decade slide. Among other things, of course. But one metric, in particular, suggests that the economy isn’t doing what it should for the middle class. The Wall Street Journal reports:

If the home-building industry had returned to the long-term average level of construction, it would have added more than $300 billion to the economy last year, or a 1.8% boost to gross domestic product, according to a study expected to be released Monday by the Rosen Consulting Group, a real-estate consultant.

In 2016, total spending on housing declined to 15.6% of GDP, a broad measure of goods and services produced across the U.S., compared with a 60-year average of nearly 19%. The share of spending specifically linked to new-home construction and remodeling likewise declined to 3.6% of GDP, just over half its prerecession peak in 2005.

If lenders were to ease credit standards back to their early 2000s levels, that could jump-start home purchases and construction activity, said Ken Rosen, chairman of Rosen Consulting and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

“If you want to get the economy going, housing is typically the flywheel,” he said.

It isn’t just short and medium-term economic growth that would benefit if more people bought and built homes. Buying a house and watching its value increase was the way middle class families generated wealth in the twentieth century. When they retired, they could downsize and use the profits as savings income. Or they could hand the home over to their children. With fewer Americans owning homes, we can expect that the middle class decades from now will be resting on uncertain foundations. And less interest in home buying means existing home owners won’t see their properties’ values rise as much as they might have hoped.

Meanwhile, the sluggishness in housing adds fuel to the fire of the debate over quantitative easing—the Fed’s $4 trillion stimulus of the banking industry that was intended to encourage lending. Whether that stimulus accomplished its intended goal remains a contentious topic, but what’s clear is that it didn’t come close to reviving the housing sector. To do that, Congress and the White House need to think about ways to address the systemic shortcomings of the American economy. Otherwise, we’ll likely see another generation that is less wealthy than the one before it.

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