What Housing Crisis?

Is the housing crisis over, at the very time the stock market goes wobbly over financial market weakness stemming from falling housing prices? Bloomberg’s Kevin Hassett thinks the crisis is nearly behind us, and prices will soon start back up.

Hassett’s reasoning:

 new home sales rose 2.8% in July, and the inventory of unsold homes fell to 7.5 months.

 in 4th quarter 2005, household investment in new homes and repairs peaked at an annual rate of $711.8 billion in 2006 dollars, according to the Federal Reserve. By 1st quarter 2007, it had dropped to $549.3 billion (2006 dollars). That 23% decrease is enormous: in the 1990-1991 recession, residential investment dropped 10%, and during the worst housing recession, 1980, the decline was only 17%.

 outside of recessions, the per capita growth of housing has been 1.1 percent since 1952, according to Federal Reserve statistics. During recessions, it drops not to zero, but to an average level of about 0.8 percent.

 housing capital “decays" at a rate of about 1.1% per year. Adjusting for population growth, the existing stock of residential real estate is now growing at about 0.3% per year, or 1% below where it was in 2005, and 0.5% below the average level experienced in postwar U.S. recessions. Because housing capital actually decays a bit faster, the stock of housing in the U.S. isn't growing at all, and may even be shrinking. That is exactly the response to overbuilding that economics would predict.

So, Hassett concludes, the drag from the housing industry is mostly gone.