Bubble Over Troubled Waters

Why the real estate bubble could be good news for the economy.

Everyone’s talking about the incipient bubble in housing and real estate like it’s a bad thing. But throughout history, investment bubbles of all kinds—from railroads to the telegraph to fiber-optic cable—have had ultimately positive effects for the economy. Sure, portfolios stocked with Cisco purchased at its 2000 high are smarting. But the prices of Web hosting and long-distance phone service have fallen sharply as a result of the overinvestment in fiber-optic cable. Depending on where and when it comes, excessive investment in a particular sector can have some salutary long-term effects—and produce lots of collateral economic activity.

Take, for example, what many are already calling the successor bubble to the dot-com fiasco: the U.S. housing market. Last month, Northern Trust economist Asha Bangalore noted that “the performance of the housing market has played a visible role in payroll growth.” She continues, “Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001.”

That’s huge. Especially since job growth has been remarkably weak for the past several years. According to the Bureau of Labor Statistics, there were fewer private-sector jobs in 2004 than there were in 2000. While the recession ended in November 2001, the United States lost payroll jobs for two more years, and payroll jobs—the jobs BLS tallies by asking companies how many people they have on their payrolls—didn’t regain their pre-recession peak until January 2005. In this period, the BLS’s household survey, which captures self-employed and part-time workers in addition to payroll jobs, has shown more growth, giving rise to what I dubbed antidisestablishmentarianism. But when it comes to payrolls, the economy remains several million jobs short of where it should be after a recession.

The jobs shortfall persisted in spite of heroic government efforts. After the recession came in 2001, followed by the attacks of 9/11, Congress and the White House jacked up spending and cut taxes massively, and Alan Greenspan sought to blow air into a slack economy by slashing interest rates furiously and keeping them low—which has proved a huge boost to the vast housing-related complex. Cheap and easy money begat higher home prices, which further boosted the demand for cheap and easy money, which begat higher home prices yet again. Meanwhile, falling interest rates allowed people to turn their homes into ATMs through mortgage refinancings.

Some might argue that all this money spent on housing could be better spent elsewhere—starting new businesses or paying down debt, for instance. But if we were going to have a tidal wave of excess liquidity flowing into any sector, real estate was as good a place as any—from a nationalistic and job-creation standpoint. After all, look what American corporations have done with Greenspan’s gift. Easy money allowed them to clean up their balance sheets and borrow short-term for almost nothing. But they didn’t deploy all that cheap money to create jobs in the United States. Instead, many large companies like IBM have cut jobs in comparatively slow-growth markets like America as they hire in comparatively higher-growth markets like India. Or they’ve invested overseas. As the Financial Times reported on June 23, “U.S. companies almost doubled their overseas investment in 2004, with foreign direct investment outflows jumping to $252bn from $141bn the previous year.” Or they’ve simply hoarded the cash.

And thanks to global trade (and global geology), lots of the easy money consumers have borrowed in recent years has been spent in ways that don’t directly create jobs in the United States. When Americans buy gas pumped out of Saudi sands, check in to resorts in Cancún, purchase toys for their kids at Wal-Mart, or even buy laptop computers from Dell and cars from the Chrysler dealership, that doesn’t translate directly into many U.S. jobs. Why? Because so much of what we buy and consume is sourced or assembled offshore.

But real estate is another story. Almost by definition, spending on housing and housing-related goods tends to stay in-country. Even better, housing-related spending spreads riches more evenly throughout the economy than, say, investment in stocks. Sure, home builders and shareholders of Toll Brothers have gotten rich. But the jobs fueled by the housing boom to which Asha Bangalore is referring are white collar and blue collar, and they range up and down the income scale: mortgage brokers and lawyers, title insurers and deed recorders, appraisers and movers, architects and engineers, interior decorators and plumbers, hardware store managers and Home Depot clerks, manufacturers of cement and lumber. Spending on housing flows into a remarkably wide range of sectors—and the overwhelming majority of the spending is local.

Now, encouraging consumers to overspend on housing so they can stimulate the local economy may not be the best industrial policy. The bubble—or the long boom, take your pick—encourages people to take on a lot of risky debt to buy expensive homes. And if it does turn out to be a bubble, lots of people might get hurt, especially those logging on to this Web site.But bubbles’ ends are notoriously hard to call. In the meantime, a lot of people are working. Where would we be without all those housing-related jobs?

The apparent reliance on housing to spur job growth could mean we’re cruising for a fall if the red-hot sector shows signs of cooling. But it’s also possible that housing was the bridge that helped us get over the post-bust job chasm. Between June 2004, when the Federal Reserve began raising rates, and April 2005, Bangalore notes, “housing and related industries have accounted for 13.0% of private sector payrolls.” In other words, as talk of a housing bubble increased, other nonhousing-related sectors were retaking the lead in job creation. To paraphrase Thomas Jefferson, it could be that a little bubble now and then may be exactly what this economy needed.