It's like living in a parallel universe. Surprising most economists, mortgage rates have gone down in recent weeks rather than up. The housing market, instead of cooling, has stayed hot, with record sales of existing homes in April. And prices are up 15% over a year ago. Even Federal Reserve Chairman Alan Greenspan, who has regularly dismissed the possibility of a housing bubble, is worrying that current trends are "unsustainable."
But whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources -- workers, materials, and money -- being sucked into home construction and renovation. Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product. That's the highest level since the late 1940s and early '50s, when an entire generation of returning soldiers was setting up families and expanding into newly built suburbs. This time, Americans are building second homes and enlarging current ones at a record pace.
By comparison, the tech boom of the '90s was at worst a baby bubble. Starting in 1991, business investment in information technology and communications gear began a steady climb, going from 3.1% to a peak of 4.8% in 2000 before collapsing.
Without much fanfare, residential construction basically followed the same path in the 1990s. Starting at 3.4% of GDP in 1991, it rose to 4.6% in 2000. But rather than turn down, as tech did, spending on housing just kept climbing, fueled by low interest rates. Measured by the increase in its share of GDP, the housing boom so far is about 40% larger than the tech boom.
Is the housing boom a bubble? As Greenspan has said, it's hard to tell. But what's certain is that housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America's competitive strength. New homes are built mainly out of materials such as wood for the frame and floors, plasterboard for the walls, and fabricated metal parts for plumbing fixtures. High-tech equipment plays a very small role. Even when new homes include cable for broadband -- so-called structured wiring -- the high-tech component accounts for at most 1% or 2% of the entire cost of the home.
Calculations by BusinessWeek show that construction is among the least info-tech-intensive of all industries. In 2003, the latest data available, only 1.6 cents of every construction dollar was used for info-related products and services, such as computer gear, data-processing services, and telecom services. This includes both the tech-related products used in the building process and tech investment by construction companies. Most other industries -- including retailing, manufacturing, education, and health care -- are much heavier users of info tech.
Astonishingly, the entire construction industry invested only $1.2 billion in information-processing equipment in 2003, according to new data. Thus, an industry with about 6% of private employment had only 0.7% of private IT investment.
What happens when the housing boom finally slows? The share of GDP going into housing construction will fall sharply, hurting construction workers, architects, and homebuilders. Homeowners will no longer be able to draw on rising home equity. And what about Americans who borrowed heavily to buy properties for investment, expecting prices to keep climbing? Much like the companies who built miles of now-unused fiber-optic cable during the 1990s, they will be in deep trouble.
Yet even if there are temporary disruptions, the end of the housing boom may be good news for the overall economy. The U.S. doesn't need to drive growth with ornate new homes and elaborate kitchens with expensive marble counters. Instead, a shift away from housing could free up hundreds of billions of dollars for other, more productive investments.
By Michael J. Mandel. Check out his new blog, Economics Unbound, only on BW Online