David Streitfeld writes that “The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.”
First see David Leonhardt on whether the boom really was all that restrained in Seattle. But the other examples are better and I think this is a reminder that the relationship between the housing market and the economy is push and pull. There was, in fact, an unsustainable bubble in house valuations across much of the country that led to localized unsustainable booms in home building and related activities. That process came to an end in 2006-2007 and we were in recession all throughout 2008 as the unemployment rose and the construction boom unwound. But then came the really giant collapse of aggregate demand in fall of 2008 continuing through the subsequent winter. Now we’re way below the long-term trend level of overall nominal spending:
Overall nominal spending equals overall nominal incomes. And we live in an economy where lots of us have contractual obligations that are nominally denominated. That’s my cable bill, it’s my cell phone bill, and it’s my mortgage, and it’s probably your mortgage too. Fortunately for me, my nominal income isn’t below its pre-crisis trend growth path. But America’s collective income is. So if our nominal income is below where we expected it would be when we signed the contracts, people are going to be unable to pay bills. That means, among other things, serious housing problems even in jurisdictions that never suffered from noteworthy construction booms.
Indeed, though there’s definitely excess housing in Florida and parts of the southwest there’s reason to believe we have an overall housing shortage right now. But people need money to purchase housing with.