A Strong Housing Market Is Critical to Our Economic Recovery

In this Saturday, March 17, 2012, photo, a pending sale sign is seen outside a home on the market in south Denver, Colorado.

Some economists and experts are pushing the notion that the key to a strong housing market is a strong economy. They argue that we don’t need specific policies to address the housing crisis, and instead should focus only on policies that grow the broader economy and create jobs.

They’re wrong.

In reality, the housing market is where the Great Recession of 2007­–2009 began and we’re not likely to see a robust economic recovery until the housing market heals. We’re beginning to see the early stages of a housing recovery with the housing sector finally starting to contribute positively to economic growth, but the housing market remains far from healthy.

Below are six reasons why lawmakers need to focus on housing to help spur further growth, rather than ignore this important business sector and hope for the best:

  • Housing booms lead the way to broader economic growth, not vice versa. During our three previous recessions—in 1980, 1991, and 2001—residential investment led the way to recovery, growing more than 30 percent on average in the first years of the recovery. Despite recent gains, the housing market has so far lagged behind growth in the broader economy, translating into billions of dollars in lost economic output and millions of missing jobs.
  • If home construction were near its historic norm, it would create an additional 3 million jobs. The housing sector traditionally accounts for roughly one-fifth of the U.S. economy, but construction on new homes today is currently about half of the historic norm. Since each home built creates three new full-time jobs and $90,000 in tax revenue, an upturn in home construction would be a significant boost for the economy and alleviate some pressure on state and local budgets.
  • Demand for homes is down primarily because of tight lending standards, not the economy. According to a recent survey from Fannie Mae, 72 percent of Americans believe that now is a good time to buy a home, but many are having a hard time getting approved for a home loan, thanks to excessively tight credit standards at banks. In August 2012 a typical rejected applicant for a Fannie- or Freddie-backed loan had a FICO credit score of 734 and a down payment of 19 percent. Data show that more than 50 percent of credit scores are below 734.
  • Consumer spending will not come back until housing recovers. High-debt households generally consume 15 percent less than low-debt households. In particular, underwater borrowers—those who owe more on their house than their house is worth—spend less on home maintenance and renovations, chilling demand in home-related industries.
  • Lack of home equity constrains small-business formation and investment. Roughly one in four small-business owners uses home equity as a source of capital or collateral.
  • Each foreclosure results in enormous spillover costs to investors, borrowers, and local communities. Foreclosures not only harm borrowers and investors but they also devastate communities. One recent study estimates that spillover costs of foreclosures have reached nearly $2 trillion. Plus, each vacant home brings down the value of neighboring homes by more than $20,000, costs state and local governments $34,000 in tax revenues and associated services, and can also become a hotbed for crime and other social problems.

Fixing our housing problems will not be easy but it is crucial to our economic recovery. With that in mind, policymakers should stop waiting for the housing sector to fix itself and should put in place policies to get the market back to full strength.

Sam Hughes is an intern with the Housing team at the Center for American Progress.