Why the housing market is still stalling the economy

If the economy still feels stuck, blame the housing market.

That may not match how people in a handful of big, prosperous cities see things. After a disastrous and historic crash, housing is booming in places like San Francisco and New York. Bidding wars are back, and the question is not whether the real estate market is recovering but whether new bubbles are inflating.

But there's another reality that is more important for the national economy. Except in a few booming markets, housing is nowhere close to pulling its economic weight. Consider this:

Investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.

If the economy still feels stuck, blame the housing market.

That may not match how people in a handful of big, prosperous cities see things. After a disastrous and historic crash, housing is booming in places like San Francisco and New York. Bidding wars are back, and the question is not whether the real estate market is recovering but whether new bubbles are inflating.

But there's another reality that is more important for the national economy. Except in a few booming markets, housing is nowhere close to pulling its economic weight. Consider this:

Investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.

Real estate agent, left,  shows prospective buyer a home on April 22, 2014 in Coral Gables, Florida.
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Real estate agent, left, shows prospective buyer a home on April 22, 2014 in Coral Gables, Florida.

If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today's mediocre 2-plus percent. The additional building, renovating and selling of homes would add about 1.5 million jobs and knock about a percentage point off the unemployment rate, now 6.7 percent. That activity would close nearly 40 percent of the gap between America's current weak economic state and full economic health.

So what is holding housing back?

Sure, a glut of housing was built during the last great mania, and in some markets buyers are still working through those supplies. Bank lending is only now thawing, both for homebuilders and buyers. But those restraining factors have eased a lot in the last few years. The bigger thing holding back housing is simply demand. Fewer people can or want to fulfill the American dream of starting a household of their own.

It may yet prove to be temporary, but for now at least, millions more people are doubling up with roommates, living at home with parents and otherwise finding ways to avoid doing the one thing that would get the housing economy back to normal: buying a home.