Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).
This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.
Again, the collapse of Lehman hastened this decline, but the end of this bubble was inevitable. In this respect, it is worth noting investment in non-residential structures is pretty much the same share of GDP today as it was at the trough of the Great Recession, supporting the view that the issue was levels were extraordinarily high before the downturn, rather than being extraordinarily low in the downturn itself.
Pointer from Mark Thoma.
I pass this along not because I am inclined to agree with it or any other aggregate-demand story, but because:
1. Explaining the depth of the recession is hard. It is easy to point to the financial crisis and do hand-waving, but as Baker points out, the actual chain of causation is not so clear.
2. Baker is someone who does not succumb to mood affiliation. His views, correct or not, are arrived at independently.
3. I had forgotten about the bubble in commercial real estate.
4. I expect to see an insightful response from Kevin Erdmann.
Lehman collapsed on Aug 2008, the recession was dated back to Dec 2007. just two months before Lehman, oil hit a peak of $140, a 40% rise in one month time from $100. Nothing much will move in this economy with oil that high. Six months later oil was at $40, clearly an oil shortage. Transportation suffered a major stop.
The most likely financial channel was OPEC withdrawing their investment funds, oil sales was a much better investment at $100 as the Saudi oil minister pointed out at the time.
Wages were stagnant during from 2000-2008, but inflation high. Dean is right about homeowners relying on their home equity to get by. But the homeowner financial stress and CPI increase was driven by the oil price jump during the period. One can see the effect of the oil volatility in the CPI for all urban goods. That combination, especially the sudden stop of transportation, would have required a restructuring of financial flows. Housing was hit, California almost went bankrupt, Greece did a belly flop, China went on a massive debt spree, and frackers got the investment money.
Looking more historical, I see the housing bubble/bust of housing 2001 to 2009 as the following:
1) Suburban housing was on a ~60 bull run with only periods of drops in real prices in 1975 – 1985 and 1990 – 1995. (And the late 1970s/early 1980s nomial house prices were increasing just not the level of inflation.) It was bound to stop and the concern really should have started when the Fed interest increases did not slow the increase debt in 2004 & 2005.
2) Also, I still see the US economy seems to have ~25 years of growth with minor recessions and then a longer recession/depression. So I assumed the Reagan Revolution, starting in 1983, in consumer debt hit over-heated in 2006 – 2008. And it is not like a really fast growing economy with a stock bubble ends up following up with a house bubble only occurred in the US.
3) The big question I do have is why the US and global economy fell into a liquidity/ 0% interest rate so long. (Really it was 2008 – 2014/2015 if you look back.) And it was not surprising as we witnessed the Japanese Lost Decade. So I tend to think all growing economies evidently go Japanese road sooner or later. So I do see it the Aggregate Demand decreasing 2007 – 2010 but not exactly the same way as Keynes as I do think the population slowdowns and aging are creating this Japanese future.
4) Following on Point 3, we are really in a grumpy 4% unemployment where business are stressed on labor and labor still feels like wages are not increasing. And I do think this coming out against people feeling comfortable with family formation until they are 32ish.
Demographics was a major factor in the housing collapse.
In the 1970’s baby boomers entering the home buying age meant that housing starts of over 2 million were justified by the demand.
But there just was not the fundamental demand to support 2 million housing starts around 2000. Moreover, it is also the reason current housing starts are viewed as weak despite the point that demographics no longer support stronger demand.
On the other hand, there was immigration, much of it illegal, and–we are finding out now–a good deal missed by people who keep statistics. It may not be a coincidence that the places that went boom and bust were largely places with a lot of immigration.
I also await an insightful response from Kevin Erdmann.
At the same time, I will keep beating my “Look at the magnitude and timing of Mortgage Equity Withdraw as a percent of Disposable Income” drum. That is “The goosing of aggregate demand by people using their homes as ATMs, to a historically unprecedented degree.” The swing from peak to crest was over 13% of disposable income, which is a big, relatively sudden, decrease in the ability to make personal consumption expenditures.
That number is a big deal, and yet, I almost never see it reflected in any of the various narratives that are told about the financial crisis and recession.
It looks like the whole “turn equity into cash” trade disappeared for a few years, leaving only the “negative” signal of people building net equity. And it’s only been during the last three years that this flow of funds returned to balance and historically normal levels of “very mildly positive”.
https://www.calculatedriskblog.com/2018/09/mortgage-equity-withdrawal-slightly.html
Aw, thank you, Arnold.
The short answer is that “the end of this bubble was inevitable” is the hinge that the discussion hangs on and that that assertion cannot be nearly as certain as it needs to be to do the work it does in all of these arguments.
My long answer is here:
https://www.idiosyncraticwhisk.com/2018/10/housing-part-324-commercial-real-estate.html