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Why the housing recovery hasn’t jumpstarted the economy

New Home Sales Plunge 11.8%New Home Sales Plunge 11.8%

The housing recovery has been over for months now.

This fact was confirmed Tuesday with the latest Case-Shiller numbers, which showed that home prices fell by 0.5% from June to July. While home prices rose 6.7% from a year ago, long gone are the days of double-digit price increases and drum-tight inventory.

And now that real estate prices have recovered to levels consistent with the pre-bubble years, it’s probably a good thing that home price appreciation has settled down. The only problem is that while valuations are back at a level that history suggests they should be, this stabilization hasn’t led to a broader recovery in the construction industry, which has historically powered the country to above-average growth following recessions. In the years following recessions in the early 1980s and 1990s, investment in housing rose, from contributing on average 3 basis points to GDP all the way to 50 points. The fact that this isn’t happening may explain why the U.S. has experienced such a sluggish economic recovery.

According to Jed Kolko, chief economist at Trulia, all of this can be laid at the feet of the Millennial generation; or, to be more specific, the fact that members of that generation can’t find jobs. In a report released on Wednesday, Kolko points out that while home prices, existing home sales, and the foreclosure rate have more or less recovered to their pre-bubble norms, two measures—new home construction and youth unemployment—show where the recovery has come up short.

As Kolko writes, these measures “connect the housing market to the job market,” because youth employment creates demand for housing, and demand for housing creates good paying, middle-class jobs that can help further spur economic and wage growth.

Take a look at the unemployment rate for workers ages 25-34—the older half of the Millennial generation:

millenial unemployment rate

As you can see, the unemployment rate for this group is well above pre-recession norms. In fact, the unemployment rate for this group is higher than what it was during the worst point of the recession during the early 2000s. That’s a problem for the housing market because in normal times, first-time homebuyers should be members of this age group. As Kolko writes,“As the housing recovery continues, it depends less on the … tendency of housing prices to right themselves, and much more on such fundamentals as jobs, income growth, and household formation.”

Housing prices have recovered, but no amount of home price appreciation can solve the fact that young people don’t have jobs, and the ones they do have aren’t paying well enough for them to form households of their own.