Theories of unemployed labor are a subset of theories of unemployed resources.
The U.S. housing vacancy rate–an unemployment rate for homes–is at its highest level since at least 1965 (see figure). Why? Is it sticky prices? Lack of aggregate demand? Structural?
House prices may be sticky but they have fallen a lot–maybe not enough–but they have fallen a lot more than have wages. On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels.
What about lack of aggregate demand? The homeownership rate was 67.2 in 2000 and today it’s 66.9. Thus, we don’t have too great a supply of houses in the aggregate so aggregate demand is likely a factor.
Is the problem structural? It does seem that we have too many houses in the South and the West where the boom was concentrated. If we think of the unemployment rate as a measure of where there are too many houses then the following figure shows that there is a positive correlation between the home vacancy rate and the unemployment rate. It’s not as tight as one might expect, however. California, for example, has a high unemployment rate but a home vacancy rate slightly below the national average and many states such as Wisconsin have plenty of unemployment but a very low home vacancy rate.
My guesstimate is 50% AD, 25% sticky prices, 25% structural. Tyler would read it differently. I do think more progress could be made if greater attention were given to theories of unemployed resources and not just unemployed labor.
I am very much in favor of this sort of exercise, but I don’t completely follow your argument. For instance how are the “weak AD” and “sticky price” arguments conceptually distinct?
I don’t so well follow your argument in this passage:
“What about lack of aggregate demand? The homeownership rate was 67.2 in 2000 and today it’s 66.9. Thus, we don’t have too great a supply of houses in the aggregate so aggregate demand is likely a factor.”
I don’t follow either why that shows “not too many houses” or the connection to AD.
On the empirics, should we aggregate state-by-state? Shouldn’t the very populous California receive more weight in our assessment than say Rhode Island?
I agree with Tyler, especially with regards to the supply of homes.
More importantly, you have not really considered the composition of homes, only the possibility of geographic bunching, about which I don’t disagree. But, as I discus here [ http://www.liberalorder.com/2009/09/the-oversupply-of-larger-homes.html ] and here [ http://www.newsobserver.com/2010/02/09/328127/big-houses-big-inventory.html ], builders responded to the changing demand for the size of homes that were being demanded and there is now an oversupply of higher-end homes.
Prices have come down but are still too high.
Buyers may be waiting for prices to come down further.
Quick response to Tyler and Mark before I run off to a meeting.
On sticky prices v. weak AD the distinction I was thinking of was partial vs. general equilibrium. i.e. Sticky prices in the house market and everything else ok versus AD problem (perhaps caused by sticky prices more generally) reducing income which reduces the demand for homes. My judgment is that the latter is more important.
The actual number of homes is not that out-of-whack given the population–which is another way of saying we had price expansion more than quantity expansion. We could absorb the homes with our current pop.
I agree on weighting by pop.
Mark raises a good point about the type of homes–this could add to the structural or sticky price explanations. It would be interesting to know whether the homes that are currently being built in Las Vegas are different than the ones that are sitting empty.
Falling home prices give people less reason to buy, not more. Most purchases require people selling the homes they are already in and in many cases those homes are worth less than their mortgages. This holds back employment as well since people can’t move as easily for work. People have become prisoners of their homes. They’re under “house arrest,” if you will.
Shouldn’t this graph also account for foreclosure rates so that it reflected how many homes there are and people that should be or were living in them (able to “afford” them)? If the aforementioned states in the South and West appear to have the excess supply of homes, did they also have the highest foreclosure rates? Had people been living in those homes, ever? Also, unemployment does not really reflect your inability to afford a home. Plenty of full-time employed folks cannot do so. A better look at “structural” vacancies should probably look more into wages.
“Houses have increased their preference for leisure.” –matt wilbert
This works on so many levels. It’s only 9:45am, but I still bet this is the funniest thing I’ll hear all day (yes–I’m an econnerd). Thanks, matt!
I, like eric, have trouble finding any value in the associated graphs when the national rate of one graph is ~4 times the other.
At least I read someone saying that “Houses have increased their preference for leisure.” Perfect to read after rolling my eyes through supposedly serious commentary debating the efficiency of gypsy beliefs that ‘the lower half of the human body is invisibly polluted’.
Given how woefully ineffective economics has proven in solving the problems it was created to address (accurately describing market conditions/cycle/stability, or making coherent economic policy recommendations)… you’d think economists might eschew the patently absurd — efficient gypsy religions, leisure favoring unemployed, unemployed with a marginal product of 0.
In general, markets with high condo concentrations do worse. (Might explain Hawaii, Florida, and some others.)
Plus age of population may affect vacancy rate. In Florida the death of a older homeowner may leave a home vacant for a long period until it sells. However an older established community such as Michigan may have many people who still have positive equity in their homes (or even own their home clear). The rapid drop in home prices does not affect their monthly housing costs – unless they need to move to seek employment. You just see gradual disinvestment in the housing stock
Low interest rates spurred people to buy housing, the monthly payment was lower. The increased demand for housing increased prices. People saw the increased value of their homes and reacted by taking out home equity loans or buying up.
The acceleration in home values made foe easy profits for many, at the start. Lenders caught the same fever. A spike in oil prices leads the Fed to talk about the need for higher interests rates – at the same time a record number of ARM are resetting. Home prices would have fallen just from the increase in interest rates and a slowing economy. However structural problems in the auto industry, related to the oil spike and long term problems in the industry increase unemployment in the midwest. California is suffering from a failed political structure. Arizona, Florida, and Nevada have seen wild speculation in real estate at the same time oil prices have reduced tourism spending. The Carolinas are less business friendly and suffer from international competition. Politicians promising an activist government with increased government spending and higher taxes take a strong lead in public polls.
The Federal government start screaming fire but don’t seem to have the ability or knowledge to fight the fire in the financial sector. Billions are still being spent on a war strategy without exit. Deferred taxes in the form of growing debt slows recovery. etc
Maybe we should fill these houses with sand.
The rental housing vacancy rate is 9.9%, the homeowner housing rate is 2.8%.
http://www.census.gov/hhes/www/housing/hvs/qtr308/files/q308press.pdf
If you have an apartment building, you can’t let a new tenant in at 20% less than everybody else. Sticky.
It’s interesting to see New Jersey as an outlier, since I think of New Jersey as having quite high property tax rates.
I have heard of the British Empire in Africa instituting taxes in order to force subdued populations to work. Is it possible that taxes can be a spur to productivity at the margin, given certain circumstances? Does this work for property taxes and real estate as well? Could it be that higher property taxes discourage unproductive property? There is some evidence for this in the Japanese real estate bubble of the 1980s (where near zero property tax rates meant that land speculation was lower risk and more profitable, leading to more speculation and a bubble).
The correlation looks pretty darn good to me considering how aggregated it is. But then I’m not an economist, although I usually don’t brag.
I’d hazard a guess that we’ve built too many houses that aren’t useful as primary residences for working age people (mostly due to poor location). It might take very large price declines to induce people to accept awful commutes or to get second-home buyers back into the market. Some subdivisions in weird locations have simply passed their tipping point from vacancies and have become ghost towns where few would venture to live at almost any price.
Liquidity (or lackthereof) seems to be a big factor. It makes sense that a lot of houses would be vacant if a lot more potential buyers (who are often homeowners) are underwater on their current mortgages. Even as prices get lower, these potential home-buyers are even more underwater they are with their own mortgage.
Houses can also be seen as “toxic assets,” where even if prices are low, liquidity preferences (for both current homeowners and non-homeowners) prevent people from buying them. We have already seen this in financial markets. I think it could be a plausible explanation too.
Correct me if this got captured somewhere I didn’t see, but wouldn’t another part of the increase be due to increased housing turnover rates due to a much more mobile population? Specifically, when I look at my parent’s (and grandparent’s) generations they tended not to move much, either within or between geographic regions. I don’t have data for this, but am assuming that the average number of years a given occupant spends in a house has been consistently going down over time. This would mean that any individual house is being sold more and more often over time. Even if the average amount of time a given home stays vacant at time of sale is constant, this effect alone could greatly increase vacancy rates.
All seem partially responsible. Structurally it is about energy prices making outlying areas uneconomic to commute from. The south is still growing long term so the excess will be absorbed over time, but for now many are in limbo or lenders hands that are slow to liquidate and won’t rent, until speculators will take them over and hold onto many of these and rent them until the market tightens, so the stickiness may not about price so much as performance. AD is the largest culprit though since renewed lending standards have shown the income to afford these doesn’t exist, consumers are overindebted, and unemployment is very high.
This may be a factor: it takes a long time to get kicked out of your house in California during a foreclosure. I don’t have figures in front of me, but I remember reading that it takes about a year to get booted out in CA, compared to a month in TX, for instance.
Speaking of how long it takes to get kicked out in California, have any of you seen “Pacific Heights” featuring Michael Keaton as the villainous tenant ruining the dreams of innocent yuppies? Don’t, it’s a bad movie.
I don’t think houses should be thought of as a resource – apart from when people work from home, they don’t contribute towards production. They are a hybrid good/asset.
And I don’t quite understand what point is being made about the correlation between unemployment and vacancies? Alex says that 50 per cent of the vacancy rate is caused by a lack of AD – so that will also be creating the unemployment. The relationship could,I guess, me used to measure how much of the vacancy/unemployment is down to a lack of AD and how much is down to structural factors/sticky prices. Outlier observations would suggest that structural/price factors are particularly prevalent
Furthermore, how would the Census Bureau (the source of the data in first chart) would know anything abaout vacant houses? Especially for 2010? There was no such question on the form…
The Census Bureau has cut the number of questions and eliminated the “long form” by moving all the detailed questions to quarterly samplings. (The decennial survey did ask if the housing unit you live in was: owned by you, owned by someone else in the household, rented, or homeless, which helps calibrate the quarterly sampling. The vacant housing data falls out as a consequence of finding no one living in what appears to be a housing unit.)
Actually, the graph almost showcases the biggest suburban growth areas since the 1960′s. I’d argue there is more to the story as it relates to over-extended infrastructure and higher gas prices as they relate to commuting times.
I agree with most of the views posted here that unemployment is growing due to the poor policies of the govt. If it is not controlled in time, then the govt. will have to face its dire consequences.
Also, Christians of today have always struck me as one of the religions least likely to take offense of criticism, mockery, or denunciation.
i think it ultimately starts at banks making mistakes and people fooling others for profit. originally, bank would give loans to people who were economically unstable and when banks would lose money if the people couldn’t pay back on the loans.
I read an article on Toronto Apartment rentals and it seems that the real estate market in this period is going through a stagnation stage… But if you analyze the market and the news, you will see that things are slowly turning around…
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