America's economy: The obstacle | The Economist: As a share of the economy, residential investment during the peak of the housing boom was high, but not remarkably so…. During the bust, by contrast, investment as a share of the economy has hit striking historical lows…. There is, at the moment, a remarkable shortfall in residential investment, far greater in magnitude than the excess in building during the boom. And that shortfall is directly related to the disappointing nature of recent GDP and employment growth.
At a dinner last night, I heard Alan Greenspan correctly diagnose this ailment in the economy, then go on to offer an extremely puzzling explanation for it: policy uncertainty. That seems off to me. I think there are two key factors generating the failure of the residential investment sector to enjoy a recovery. One is the dismal outlook for demand growth, which has had a particularly relevant impact on household formation (there are lots of people doubling and tripling up at the moment). And another is the failure to get mortgage markets working again: despite rising rents and rock-bottom interest rates, mortgage lending remains at very low levels….
It would seem that there is substantial pent-up housing demand, and if policies become more supportive of growth generally and mortgage lending, then a bounce-back in residential investment could help America make up a fair amount of economic ground in a short period of time…. The country may have had too many housing units at one point during the boom, particularly in certain outlying areas in especially bubbly markets. Whatever national excess there was has vanished. Once growth triggers a rise in household formation, housing demand will soar, and if the government can't clear up the lending channel, rents will begin soaring too.