July 27, 2010
Let’s talk about the housing market and how it affects our economic recovery. Among the things you are known for is the Case-Shiller housing Index, which has hit the headlines in a very prominent fashion in light of some of the recent ups and downs in the US housing market. In April you published an opinion piece in the New York Times expressing some doubts as to whether the US housing recovery was sustainable. Could you talk a little bit about that?
We have had wild swings in home prices in the US. We reached a peak around 2006 and bottomed out in early 2009, and then it seemed to be sharply recovering. But the question is, what happened in early 2009? I mentioned that the Obama administration had come in with the new economic plan, but also very high on the list of that new economic plan's features was what started out as a first-time homebuyer tax credit. It expired initially in November 2009, and then they extended it to April of 2010.
Obviously that got people buying again, because they didn't want to buy after the credit expired. Now the questions are what will happen when the credit is over, and will that boost in home prices be just a temporary thing? Usually, declining home prices go on for years. The big question is, is it going to go back to a period of decline or not? That is something we are about to see.
There are some measures in the past that predicted housing prices. Can you talk about what those show us?
I like to use the National Association of Homebuilders Housing Market Index. That index is collected from homebuilders who keep their finger on the pulse of the market.
Is it a reliable measure of sentiment?
It's the homebuilders’ perceptions of home buyers’ sentiment. Their Index peaked in 2005, and it dropped catastrophically until around 2008- 2009. Then it started recovering, but it hasn't recovered very far.
Those initial signs of recovery have been faltering lately. What I am hearing from the homebuilders is they don't see that demand is there. This is confirmed by the fact that new construction is practically at an all-time low now. Housing starts and housing permits are extremely low. It reflects the fact that people are not yet in the mood to go out and buy a house. It reflects this fundamental uncertainty and lack of confidence that still pervades in the economy.
Some of that is related to the high levels of unemployment and whether we will have a sustained recovery. What it's going to take to get home prices up – more confidence about the economic future?
That's the problem. Right now, long-term unemployment is at record highs. That's troubling. A lot of people who were mid-career saw their jobs interrupted and don't have any prospect of getting anything back like they had. They talk and they stir up discontent. We have the talk about debt crises in Europe, which reminds people of their own country's debt problems. A number of countries have pushed up their national debt to high levels because of their stimulus needs.
There is a malaise about this, because people think that we don't have a solution and don't have a way out. There is a sense in which economists have failed us. The stimulus package – maybe it worked and maybe it didn't. Maybe we won't get more stimulus, and so people are edgy and still in a wait-and-see attitude.
I'd like to talk briefly about the book, Animal Spirits, you co-authored last year with George Akerlof, the Nobel Prize Laureate professor at Berkeley. Could we start by talking about where the idea for this book came from?
We traced the term 'animal spirits' back to the British economist John Maynard Keynes. For him, animal spirits was your spirit, what makes you get out of bed in the morning, what makes you start a business, buy things, and make the economy go. Keynes thought that it fluctuates. He wondered about what it is, what underlies it, why is it that sometimes we don't want to start things, and why we don't want to do things. People have been wondering ever since, because it is the driver of the economy.
Akerlof and I think that it has a lot to do with expectations, and a sense of normalcy that things are alright. We have a good government. Our businesses are sound. And I am going to spend?
At other times, you just get shaken from that. People don't necessarily express this, or explain this very well, but their view of the world changes and they become more circumspect and reluctant to spend. That brings the economy down.
So you end up with a bit of a downward spiral. People stop spending, and if enough of them do that then the economy turns down, and it becomes one of those downward spirals. Is that what you are suggesting?
This is what Roosevelt meant by the only thing to fear is fear itself. There were other thinkers in the Great Depression who said that we seem to have been down mentality. One psychologist called it a slave mentality. It's like it's hopeless. I'm going to go home and listen to the radio to cheer up. They had Rudy Vallee to cheer them up, but they were not going to do anything, because they had to wait. Everyone was waiting.Display article as PDF for printing.
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