Housing market fundamentals

The Great Financial Crisis taught most of us that private credit matters. Nowadays, for instance Tyler Cowen uses Steve Keen kind of explanations in stead of general equilibrium ideas: there is no great Pareto optimal intertemporal general equilibrium. The crisis also  taught most of us a (to quote Paul Krugman) ‘dirty little secret‘: monetary policy works via the housing market (hmmm… where do these bubbles come from?). Which makes sense: houses are our most important asset. And mortgages are our most important kind of credit.

Anthony B. Sanders has a nice graph which binds private credit and the housing market in the US of A together, using so called ‘deep’ parameters like the employment to population rate, home ownership rates, the rapidly rising share of 20-34 year olds living with their parents (not in this graph but already at 25% in the US of A) and comparable variables. Note that he does not need house prices or volumes of credit to show the housing bubble, which has origins dating back to 1995-1999. Fred Foldvary, who used to be a regular commentor on this blog and who repeatedly emphasized the ‘Georgist’ 18 year USA credit/housing cycle, would not be surprised. In a very real sense, QE served to mitigate the consequences of the debt build up followed by house price decreases caused by the housing cycle. Instead of QE the US of A government could, as  Rogoff argues, have written down more debt but Larry Summers does not agree (about debt in the Euro Area later today some links).

Aside: note the tight ‘Phillips curve’ co-movement between wage increases and the employment rate which seems to be stronger as well as more stable than the ‘unemployment-wage increase’ Phillips curces.