Slow Jobs Market? Blame Housing

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While testifying before Congress earlier this year, Federal Reserve Chairman Ben Bernanke was asked if there was precedent for the economy recovering from a recession while the housing market stayed weak. He looked puzzled, thought about it for a moment, and replied: "It's normal for housing and construction to be an important part of the recovery."

No, in other words.

The key to getting the economy back on track is deleveraging -- paying off debt accumulated during the bubble years. For households, the vast majority of that debt is in the form of mortgages. In that sense, housing not only caused the recession, but it's by far the biggest impediment to recovery.

But it goes beyond paying off debt. In a report released last week, the Fed asked a simple question: How many of the 8.7 million jobs lost during the recession were tied to the housing market?

Its answer: about 40%. And that probably understates it.

Of all the jobs lost between December 2007 and February 2010, 2 million -- or 22% of the total -- were construction jobs. The Fed estimates another 1.6 million jobs were lost due to knock-on effects of those construction workers cutting back on spending after they lost their jobs. Add those together, and nearly 40% of all jobs lost during the recession were due to the soured housing industry.

That's where the Fed's analysis ended, but I think you can take it a step further.

Since peaking in 2006, the financial industry has lost about 500,000 jobs. Most of those jobs were tied to housing in one way or another. There are actually fewer financial jobs today than there were in 1999, even though the overall population has grown by 13%. And that trend doesn't look like it's letting up anytime soon. More than 2,500 banks -- or one-third of the total -- cut jobs last quarter, according to The Wall Street Journal. Big banks like Citigroup (NYSE: C  ) and Goldman Sachs (NYSE: GS  ) are slashing headcounts as once-lucrative trading avenues disappear -- partly because of new regulations, but partly because the housing industry that used to fuel such trades is now a fraction of its former self.

And then there's the impact lower housing prices have on consumer spending. According to the Congressional Budget Office, every $1,000 decline in home values causes households to cut spending by $20 to $70 a year. That's the power of the wealth effect, or the theory that people's willingness to spend is based on how wealthy they feel. 

Since 2006, U.S. housing values have declined by $7 trillion. Using the CBO's assumptions, that translates to a decline in consumer spending of $140 billion to $490 billion per year.

How many jobs has that cost? It's hard to say. As a rough rule of thumb, every 2% decline in GDP causes unemployment to rise 1%, eliminating about 1.5 million jobs. At the high end of the CBO's estimate, a $490 billion decline in consumer spending could be responsible for 2.4 million lost jobs.

Add that to the 3.6 million jobs lost from construction and the 500,000 lost finance jobs, and you get up to 6.5 million jobs lost directly or indirectly to the housing market -- nearly 75% of the total lost during the recession.

Now you know what Bernanke is talking about.

As ugly as that is, the reality is many housing-related jobs never should have existed in the first place. When thinking about housing-related job losses and the potential recovery, you have to make a distinction between jobs tied to the housing market and jobs tied to the housing bubble. Many fall into the latter group. According to economist Mark Zandi, 23% of all new jobs created from 2003-2006 were housing-related. Many won't come back -- nor should they.

But things may be turning a corner. We're now nearly six years past the housing bubble's peak, home prices are back to 2003 levels, and housing construction is far below the level of household formation. Housing may be closer to the bottom than some think. And with so many jobs tied to the industry, even a small upturn could boost the entire economy.  As Warren Buffett said this summer, "We will come back big time on employment when residential construction comes back. ... You will be surprised, in my view, how fast things change when that happens." It can't come soon enough.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Citigroup. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On December 06, 2011, at 5:26 PM, xetn wrote:

    Housing did not couse the financial crisis, the Fed, Fannie and Freddie were mostly responsible. The Fed because it created so much currency which drove down long-term interest rates to near historic (or maybe not so historic) lows. Freddie and Fannie (with help from the likes of Barney Frank and ACORN which pressured lenders into the sub-prime market.

    I am not discounting consumers who chased rapidly rising real estate prices, thinking they could never go down.

    At the same time, the stock market was also rising rapidly thanks to the tendency of stocks to rise with reduced interest rates.

  • Report this Comment On December 06, 2011, at 5:48 PM, slpmn wrote:

    Nice analysis, Housel. I work with banks, and the collapse of the residential real estate market (and follow-up mini collapse of the commercial real estate market) is the number 1 reason banks continue to struggle today. Their bread and butter was making development loans (homes and strip malls).

    Residential development essentially stopped in 2008, and in the markets I see, there are only whispers of movement today. When I think of all the lost construction related jobs (think carpenters, laborers, plumbers, electricians, HVAC guys, window companies, door companies, etc. etc. etc.) it's amazing to me things didn't get even worse.

    And @xetn, please give me a break with the "fannie and freddie caused it" stuff. In my experience I have NEVER seen a bank pressured, much less forced, to make a bad loan. It doesn't happen. The worst that can be argued is that the expansion of home ownership was public policy promoted by both parties at the very top of government, up to and including George W. Bush (remember the "ownership society"?).

    The response was a massive boom in PRIVATE companies making hundreds of billions in bad loans to home buyers, which then sold them predominantly to PRIVATE banks to be repackaged and resold as the infamous CDOs. Fannie and Freddie primarily were factors in that they themselves were burned by buying the garbage.

    Finally, it's all about deleveraging now. Where I agree with the likes of @xetn (I think) is that I want the Fed to back off on the ridiculous easy money policy. I tend to agree with those who argue the low interest rate policy kicked the whole thing off (housing bubble), and I really find it hard to believe that it's a healthy policy now... The fat kid doesn't need any more sugar, especially when he's trying to lose weight.

  • Report this Comment On December 06, 2011, at 6:02 PM, dgmennie wrote:

    Lots of pundits these days blame the weak housing market for just about everything from stock market turmoil to bad hair. But isn't it much more likely that other factors have now combined to make home ownership simply unattainable? Who in their right mind is going to buy a house when they can't count on a steady job? For those who still have reliable personal income, who is going to buy when the lenders want 20% or more down? It doesn't matter that mortgage interest rates are 3 or 4 percent if you can't qualify for a loan. About the only winners here are big banks who can borrow from the Feds for practically nothing while making credit card loans to consumers at rates from 12 to 24 percent (for the good customers). Who knows what the unfortunate who missed a payment are forced to caugh up?

    The Motley Fool 'hero for all seasons' Warren Buffett has it exactly bacwards when he claims, "We will come back big time on employment when residential construction comes back. ... You will be surprised, in my view, how fast things change when that happens." NOT SO! First you need jobs for the middle class to kick in big time. Without this you got NOTHING.

  • Report this Comment On December 06, 2011, at 6:28 PM, Chontichajim wrote:

    You have it exactly right if not understated in our area. Not only does the lack of new housing impact construction it has caused retail stores to close, nurseries to close, Jobs connected to housing like inspectors, bird control, concrete, and other jopbs you wouldn't know were connected to new housing until they are gone.

    I have no idea why anyone would say unemployment caused the weak housing market and not the other way around unless they just immigrated here less than 2 years ago. Low interest was not to blame for the housing crash, it is an attempt to restore buying power, but it is not enough without people getting out from under existing debt, and finding employment.

    I hope nobody's family well being is dependent on psuedo investors who see everything in the world through their narrow political beliefs.

  • Report this Comment On December 06, 2011, at 7:23 PM, Borbality wrote:

    the US needs to find another unsustainable thing to keep it going for another 10 years or so. Maybe we can start borrowing against our job experience and selling it to unemployed people for more! We need to get creative, America!

  • Report this Comment On December 06, 2011, at 9:08 PM, xetn wrote:


    You must be blind then. I worked in banking for 15 years and know first hand about the influence of Freddie and Fannie.

  • Report this Comment On December 06, 2011, at 11:02 PM, CaptainWidget wrote:

    Dead nuts. The mis-allocated assets need to clear out for the economy to get back on track. In this case it means houses that shouldn't haven't been built need to find real buyers to trade their hard work for them and then live inside of them. This is obviously tied to population growth and growth in other productive industries.

    It's tough right now, but a necessary shift of the resources in our economy. The real question is when resources shift....where are they going to go? What can we do in regulation laden US better than elsewhere in the world?

  • Report this Comment On December 07, 2011, at 2:18 AM, marc5477 wrote:


    Then youre a bad banker because Fred and Fannie are nothing more than tools. No bank was forced to sell anything to them, but they did it so they can sell more stuff. The funny part is that the banks repeated the same mistakes with their own portfolios which tells me the banks were running on 100% greed as were the people buying with 0% down. Everyone committed fraud, the buyers who falsified information and peppered bank accounts and banks who did not even bother to investigate knowing full well that most of the people applying were lying out their back side. Unfortunately, fannie and freddie were NOT the ones who originated the loans. They assumed that banks did their jobs properly because that was how they were set up.

    Disclosure: I dont like bankers... or anyone else who does something immoral and shrugs it off as part of life while hiding behind miniature print and buyer beware statutes.

  • Report this Comment On December 07, 2011, at 10:22 AM, TMFDarwood11 wrote:

    I agree that the impact of housing is probably understated. New homes need appliances, carpeting, furniture, etc. as well as copper and plastic piping, insulation, roofing materials, landscaping, etc.

    I have the sense we have two parallel economies, the populations of which are acting very differently.

    I'm of the opinion it's going to take a long time. While deleveraging the consumer is diverting financial resources to pay off debt. In some cases that seems to be reducing savings. Revolving credit peaked in 2008 and has since dropped about 17.6%, but non-revolving dropped 4.3% per the Fed. These figures exclude real estate.

    While all of this is going on, we are slowly being reeducated, but I suspect there are opposing forces at work. These include fear and desire. On the re-education front, it seems we're learning that: 1) Homes aren't an absolute necessity nor are they necessarily a wonderful investment. 2) Do we need all of those discretionary things, from restaurants three times a week to nail salons weekly, etc.? 3) Some are re-learning how to save.

    Personal savings according to the BEA has been running higher that it had for the previous decade (1998-2007 monthly average =3.1%, 2008 to October 2011 =5.1%). There is also pent up demand. There aren't enough houses being built and people do need automobiles, etc. So at some time the consumer will and does "open" the wallet or purse. Will they have the funds and the credit to make those purchases and create jobs?

    This is actually far more entertaining that "America's Got Talent."

  • Report this Comment On December 07, 2011, at 2:45 PM, whereaminow wrote:

    On December 07, 2011, at 2:18 AM, marc5477 wrote:


    Then youre a bad banker because Fred and Fannie are nothing more than tools. No bank was forced to sell anything to them, but they did it so they can sell more stuff.


    This is correct, but an exchange involves TWO parties. Fannie and Freddie were under no obligation to buy anything either, but they did.

    The banks and the government have a symbiotic relationship. Sometimes they are not in step, but the banks rely on the government for special privilege (suspension of payment, monopoly of currency issue, etc) and the government relies on the banks to loot the productive class when no more taxes can be raised (selling gov debt, inflating the currency, etc.)

    Their interests align at the point where you can be skinned for them. Their interests diverge at the point of figuring out who to blame when you no longer can be skinned.

    I suggest, probably on deaf ears and blind eyes, that you pick up some books by Murray Rothbard or Ludwig Von Mises or viist to learn more about the history of money, banking and government in the United States.

    Everything that has happened was predictable and was predicted. Find out why.


  • Report this Comment On December 07, 2011, at 4:33 PM, Doris411 wrote:

    Fannie and Freddie were created to promote home ownership by providing a secondary market for mortgages, before collateralized mortgage obligation instruments existed.

    Instead of a bank or S&L making loans to the extent of their deposits, holding and servicing the loans, the secondary market allowed them to sell the loans and re-lend the money. To that extent, the very existence of a secondary market made mortgages easier to obtain, but it did not obviate the banks' responsibility to underwrite responsibly.

    Responsible underwriting was in the lenders' best interests when loans were sold with recourse, meaning that the lender had to recompense the buyer for at least a portion of loan losses. As the risk of loss moved away from the originator and toward the investor, is it any surprise that underwriting got sloppy?

    The availability of jumbo loans, which I personally believe helped fuel the inflation of home prices, was hugely affected by Fannie and Freddie's rules on what they would buy. It used to be that any loan over $250K was a "non-conforming" loan that could not be sold through the normal process. Loans with minuscule down-payments were also considered non-conforming. There were a lot fewer of them then. Wonder why?

    FNMA and Freddie also used to demand stringent documentation of loan qualification -- all that red tape about proving income and property appraisals that made borrowers complain. Again, when they became less demanding, lender underwriting became less diligent. After all, the loan originator wouldn't be on the hook when the loan went sour.

    I don't think Fannie and Freddie caused the problem exactly, but they might have made it less likely and they didn't.

  • Report this Comment On December 07, 2011, at 6:57 PM, TMFDarwood11 wrote:

    Meanwhile, here in 2011, there is a discussion that FHA has become the new 'subprime.'

  • Report this Comment On December 08, 2011, at 12:27 PM, Sparkynet wrote:

    Please read "All the Devils are Here" and you'll realize the whole mortgage mess was sort of a perfect storm. It started with the a $20k a year janitor getting a $500k mortgage with another loan for a down payment and ended with Wall Street buying and then betting against CDOs. Anyway, my take is the main culprits were the ratings agencies. The AAA ratings made everyone feel safe about these investments. The scary thing is no one has gone to prison and no one will.

    Back to housing, I don't see prices recovering anytime soon. I think we will become more of a rental society. Investment opportunities may lie in multi-family. Possibly we will see improved construction employment in this area.

    However, to get real job gains we need better education. The company I work for ( a large German conglomerate) has 3000 jobs they can't fill because of poor training in high tech manufacturing processes.

    By continuing to just point fingers at your political enemies you are confirming only that you have no answers.

  • Report this Comment On December 13, 2011, at 8:21 AM, DJDynamicNC wrote:

    One thing to remember about housing prices declining - it's not automatically a bad thing. Imagine this headline:

    "Housing becomes dramatically more affordable for new home owners and renters"

    That sounds like great news! The problem arises when we treat our homes as investments instead of as, you know, homes. If all of my net worth is tied up in this stationary, hard to sell, hard to maintain, slowly rotting box made of wood, then sure, I'll have problems if the market for rotting boxes of wood declines.

  • Report this Comment On December 13, 2011, at 12:32 PM, slpmn wrote:

    Ouch, please don't call it a rotting box of wood. My 1939 house resembles that comment a little too much.

    I like the idea of calling investments what they are, though. "I would like an ounce of that shiny yellow metallic substance for $2000, please!"

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