Part 6: The Role of the Housing Collapse in Unemployment

November 21, 2011

Nearly 2 million people lost their jobs when the overbuilt housing market collapsed, with another 800,000 jobs lost in peripheral industries. Waller discusses the ramifications.


Christopher Waller: All right, the second question. I'll get to these in the next slide or two. How many of you think it's important in terms of being under water affecting worker mobility across state lines and is contributing to high unemployment? So the idea that your house is under water, and if you sell it, you'll take a loss. Well, about a third of you think it's "very important," 28 percent "important," 28 percent "somewhat important." So people think this is an issue.

All right, so let's think about housing. That's kind of a lead-in to housing. And I'll talk about unemployment insurance and back to that other question a minute. Now one of the things is, we went through a period where we had a huge housing bubble and a big housing collapse. The collapse in housing caused 2 million construction workers to lose their jobs. Okay? Now that's almost 25 percent of the total I told you at the beginning. Okay?

So housing was—almost one in four jobs was construction workers. Now, prior to 2007 during the housing boom, employment boomed in these sectors. Okay? And there were other industries—and I'll show you some stuff in a minute—that are obviously tied to housing that also saw large creases.

So if you think about a house, you have to go buy washers, dryers, refrigerators, ovens, landscaping. All the stuff that goes with a house, these are things that, whenever there's a housing boom, people are buying these things on top of it. So you say, "Oh, I'm not in the housing industry. I'm in the dishwasher industry." Well, guess what? You're very closely tied together. Okay?

Now one of the things that people have argued about whether there's just low demand, that the government or the Fed just needs to stimulate aggregate demand and get everything going is that, look, even if you—if these are construction workers, the only way you're going to get a lot of construction workers back to work is do what? Start building a bunch of houses. We've got plenty of houses. That was the problem with the housing bubble. Okay? We built effectively 12 years worth of housing in about five.

So any of you that ever run a firm with management, if you build up your inventories that big, you're going to stop production, and it's going to take you a long time to run those inventories off if you get them that high. Okay? So building more houses isn't going to solve the problem. Okay? It's just saying, "Oh, reinflate the housing bubble."

Now, during the last four or five years, one key sector that has not gone down in employment is the healthcare sector. Okay? There's actually been job growth even during this recession in healthcare. It's very hard to take a carpenter and turn him into a nurse. It would be nice if you could, huh? Here, there you go. Okay? It just doesn't work quite that way. It takes some retraining. It takes a lot of things to get people shifted across industries in particular.

And the other thing I want to point out is, with the housing market collapse, it's not like you can say, "Oh, yes, but commercial real estate is booming," or, "Other construction projects are booming. We'll just move them over there." Almost all construction of any kind in the U.S. is just dead. And it has been for a while.

Now the housing market, there is this—I go back to the question—there is this issue that people are under water. If they tried to move—this is the story—if they try to move, they'd have to sell their house, realize the loss on their house. And because of that, they say, "I can't afford to eat the loss on my house, so I'm not going to move. I'm not going to take a job." Okay? So there's some evidence that that may be impeding people's decisions.

There's some other evidence that says the following: If you're under water, you're under water. You could just walk away from the house. You don't even have to sell it. That's even easier. So just walking away from houses is an easy way to relocate. Okay? It's when you have equity, maybe not a lot, but you're like, "I want to get that equity back. I'm going to hold onto this house, and I'm going to sell it. And only when I sell it am I going to move."

If you're under water, you're under water. Jingle them—you know, put the keys in the mailbox at the bank and pack up the van and head to Beverly. That was Jed Clampett and the clan did. So the point is, the evidence is mixed about this. It's not clear that a house lock is causing a lot of frictions in the labor market. So I wanted to put in the construction thing, because I wanted to just point out that the housing bubble in many ways started in about '96. Because you can see if you look at employment and construction, over a very short period of time—four or five years—it goes up almost 30 percent.

Employment in residential construction goes up 30 percent over about five years. If it grew at the normal population rate, it would be 2 percent a year. So it was booming in the '90s. The recession hit. It kind of stalled a bit. And then, boom, it took off again, and then pretty dramatic collapse. So construction employment is about back to where it was in 1996. So if it was just growing at 2 percent, it would be up about here. Okay? And so if it was just growing at a steady 2 percent trend, if we hadn't built all of these houses and just kind of built as population came up, employment would be about here.

All right, now, one of the economists on staff, Juan Sanchez, did some work for President Bullard for an FOMC briefing. And there was this idea—remember this peripheral industry? Dishwashers, ovens, landscaping—these peripheral things tied to housing? So Juan went back and went through the data and did some analysis, saying, "These are kind of correlated things. These move together in very precise ways. They're not just randomly moving together," and backed out a number that, in addition to that 1.9 million jobs that were lost from just straight residential construction, about another almost a million—800,000 jobs—in peripheral industries were lost because of the collapse in housing.

That's almost 40 percent of the total loss in unemployment or in jobs. So what we're seeing is a big recession heavily dominated by one sector. And so this idea we'll just fix it is not going to be that easy. If you could just reinflate the housing bubble, sure. Put them all back to work building new homes. But that's not on the table in any serious way.