Wednesday, January 10, 2018

Housing: Part 276 - No, the Contagion cities aren't in better shape today.

Bill McBride, at Calculated Risk, has a post up about economic growth in the bubble cities (HT: Daniel Miller).  McBride points out that unemployment rates are low in cities like Riverside, CA.  And, since their economies are less dependent on construction and building now, their recovery is on more solid ground.

I think this is a good example - one of many - of how the notion that the bubble was the anomaly and the bust was a return to normalcy, shades one's viewpoint about what is happening in the economy in general in a way that diverts focus from important issues.

Now, first, I would say that the ideal world would be one where Los Angeles and San Francisco were growing instead of Riverside and Phoenix.  Really, what we have here (and I say this as a happy resident of the Phoenix area) are cities that are inferior substitutions for cities where residents would rather live.  The growth of Phoenix and Riverside is largely the product of a post-industrial refugee crisis, as financially constrained households are forced out of cities with limited housing options.

But, given the world we have, cities like Phoenix and Riverside should absolutely be growing, and it would be appropriate, right, and healthy for their economic growth to be dependent on construction.  In truth, even without the Closed Access refugee problem, Phoenix would likely have strong migration in-flows from the Midwest and the North.  But, certainly, in an economy with an unencumbered financial sector and coastal housing shortages, these cities today would be growing at their practical limits.

This is where unemployment rates can be a bit misleading.  In cities where economic expansion is manifest in migration, it is primarily migration shifts that adjust to changing conditions.  This is why the recession beginning in December 2007 is dated so long after the Federal Reserve had initiated policies that were too contractionary.  Employment growth had started to turn south at the end of 2006, but this didn't lead to much of a rise in unemployment rates, because at the time, hundreds of thousands of households were flooding out of Closed Access cities to escape their rising costs.  So, the first thing that happened was that the migration flows abruptly stopped in 2007.

It was only after this first adjustment in migration patterns that unemployment started to rise.  Here is a graph of LA & Phoenix employment (indexed for comparison) and the unemployment rate.

Source
In the 2001 recession, when employment growth stalled, the unemployment rate rose in both cities.  But, notice what happened in 2006.  There was a downtrend in employment growth in both cities, and that continued until 2008, when employment dropped disastrously in both cities.  (As an aside, this chart is one of many that makes me shake my head at the pressure the Fed was taking in September 2008 not to stabilize the economy.  For Goodness' sake.)  Notice two other things, too:

1) Employment levels held on longer in LA than in Phoenix.  Phoenix employment really started to fall at the end of 2007, after the subprime market crashed.  LA held on until the September 2008 debacle.  Previously, about 2% of Los Angeles' population had been moving away each year, many of them to Phoenix, but this mostly stopped by 2008.

2) In August 2006, the unemployment rate in Phoenix was 3.6%.  In LA it was 4.4%.  A year later, in Phoenix it was down to 3.1% and in LA it was up to 4.8%.  We can see the effect of the whipsaw in migration in the unemployment rates.

By many measures, one could reasonably argue that a weak recession had begun by the middle of 2006.

Now, back to Bill McBride's comments, we can see the damage that the housing bust did to the Contagion cities more clearly in population and income levels than in the unemployment rate.  And, the economy since 2005 has not been kind to them.

Source
Here is a graph of personal income per capita (indexed to 2005 at the peak of the housing boom).  Before the Great Recession, incomes across cities of all types correlated reasonably well with one another.  But, when the housing bust hit, and was enforced, the damage was targeted at the cities which had previously been both aspirational destinations for Americans from the interior, and a release valve for Closed Access refugees.

LA is in black.  The Contagion cities are in orange tones.  Other cities are in blue tones.  The damage has especially hit the Contagion cities.

Source
We can see the effect in population growth, too.  Here is a similar graph, showing the Civilian Labor Force for each MSA (indexed to the end of 2007, when the housing bust and the recession had eliminated net in-migration).  The Contagion cities were fast growers during and well before the housing boom.  In fact, in spite of the errant claims that they had overbuilt during the boom, their growth rates didn't change that much during that period.

But, they changed drastically with the bust.  (Much of the deviation after the bust, in the graph, is from 2010 Census revisions, but we can see that the trends across all cities were fairly flat.  Only recently have labor force growth rates picked up somewhat in those cities.

What would be great would be if LA managed to grow again.  But, lacking that, healing will come with growth in the Contagion cities.  And, the causation isn't that we need to build homes to boost spending.  (Well, first and foremost, we need to build homes because they provide shelter and access to urban amenities!)  The causation is that a functional, healed economy will manifest itself in a return to old patterns - migration, homeownership, incomes that moderate between various cities.

But, for now - no.  These cities aren't in better shape today.

2 comments:

  1. Top blogging again.

    "As an aside, this chart is one of many that makes me shake my head at the pressure the Fed was taking in September 2008 not to stabilize the economy. For Goodness' sake."--KE

    There is an incredibly deep bias, or cult, that money must always and everywhere be tighter.

    I recently exchanged emails with Tyler Cowen, a great blogger. I asked him to link to a blog I wrote advocating the consideration of helicopter drops rather than mounting national debts.

    Given the way that Western democracies work, and given that austerity seems to result in even larger deficits, I stated that national budget deficits are inevitable.

    So why burden future generations with crushing debt? See Greece or Argentina.

    Not a topic for discussion.

    Money is more sacred than prosperity.

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