A Productive Take on the Housing Crisis
Generating more in an allotted amount of time has its rewards. More output in an hour causes more stuff for people, companies, and governments to buy. When it’s a widescale trend, it’s called productivity growth. The relationship between productivity growth trends and housing appreciation is a strong one.
When non-farm workers produce more output per hour, and the economy is cranking along, it’s normally accompanied by income growth. Now, income growth de-coupled with house price growth, but it was still enough to cause demand for houses, which drove up land prices, and made the bubble.
This is the theory in a new study from the Federal Reserve Bank of New York, namely from former New York Fed VP James Kahn, who is now an economist/professor at Yeshiva University in New York.
The Wall Street Journal’s take:
Lax lending standards and price bubbles caused the housing crisis? That argument alone is too simplistic, says a study released today by the Federal Reserve Bank of New York. Changes in productivity were a major factor in driving housing prices higher, economist James Kahn finds in his review of half a century of data.
Kahn’s theory actually affirms all of those home building CEOs who tracked “the fundamentals” right through 2006, and found them to be strong.
But this is one of those annoying issues of coincidence versus causality. Productivity growth occurs when demand is strong, and a virtuous loop of demand and greater output drives a wide swath of economic growth.
Amid a deleveraging of the economy and households, productivity will probably suffer as people cuts lag demand declines, and hiring lags demand increases.
Kahn’s theory may have some insight for residential real estate players in that it would correlate a recovery in productivity with a recovery in home price stabilization.
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