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Housing and the 2008 Recession Ryan Ratcliff, Asst. Professor of Economics Jan. 16, 2009 Housing and the 2008 Recession Housing has been a drag on the economy since early 2006. Historically, housing slumps lead recessions by 8-12 months – predicting an early 2007 recession.

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housing and the 2008 recession
Housing and the 2008 Recession

Ryan Ratcliff, Asst. Professor of Economics

Jan. 16, 2009

housing and the 2008 recession2
Housing and the 2008 Recession
  • Housing has been a drag on the economy since early 2006.
  • Historically, housing slumps lead recessions by 8-12 months – predicting an early 2007 recession.
  • However, the overall labor market didn’t start to deteriorate until late 2007, when financial panic compounded housing weakness.
  • CA was overexposed to real estate problems, slumping earlier and deeper than US.
  • SD usually fares better than CA as a whole… but not this time.
housing is a good predictor of recessions
Housing is a Good Predictor of Recessions

US Real Residential Fixed Investment / Worker (2000 $)

US Housing Starts (000s SAAR)

Housing Slumps Lead Recessions by ~8 months

798k

625k

an overdue housing recession
An Overdue Housing Recession

US Real GDP Growth (SAAR) by Category

  • Housing Construction has been a -1% drag on GDP growth since 2006.
  • Usually, recessions start ~2 qtrs after housing peak – late 2006.
  • Weak dollar and resilient consumer offset housing weakness in 2006-7.
  • The official recession began as both of these factors weakened in 07Q4.
financial crisis kicks over the cart
Financial Crisis Kicks Over the Cart

Short Term Credit Spreads and US Non-Farm Payroll Employment (Peak=100)

  • Foreclosure rates saw an unprecedented spike in mid-2007, leading to unexpectedly high losses on MBS + derivatives.
  • The post-subprime credit tightening becomes a liquidity crunch in late 2007 as short-term credit markets shut down.
  • Aggressive intervention by Fed and other CBs gives a brief respite in early 2008, but wave of bank failures makes the 2007 credit crunch look tame.
  • While housing weakness set up the recession, the deterioration of the economy is more closely linked to the financial crisis.
here in california
Here in California…

CA is over-exposed to the cause of the recession (again)

CA and US Unemployment Rate

Ann. Growth in CA NFP Employment

recession hits sd harder than usual
Recession hits SD harder than usual

YoY NF Payroll Emp. Growth,

San Diego vs CA

Real Estate Job Impact in CA Metros through Oct. 2008

is this another great depression
Is this another Great Depression?
  • Fed and Gov’t blunders turned a bad recession into the Great Depression:
    • Tariff war kills export sector
    • Gold Standard -> Higher interest rates
    • ’29-’33: 40% of US banks fail, Money Supply drops by >30%
  • Post-Depression institutions (FDIC) + Fed intervention + Bailout News forestalled a financial collapse, but we haven’t solved the bad debt problem. TARP flip-flops muddy the waters.
  • Barring some 1930s-style government bungling, our financial crisis should be a painful, but typical recession.
  • Bernanke is one of the leading scholars of the economics of the Depression…
where do we go from here
Where Do We Go From Here?

US Economy

  • Bailout heads off a financial collapse, but we still have a major credit crunch.
  • Lack of lending makes monetary policy impotent, and tax cuts go under the mattress… A real stimulus needs to be spending-based.
  • Combination of continued housing weakness, consumer slowdown, and credit crunch is at least another 12 months of economic weakness.

CA Economy

  • Weakness in private sector + budget deficits = slumping CA economy for the foreseeable future.
  • One dim flicker of light at the end of the tunnel: home sales are rising in most counties…