Economic recoveries are generally lifted by new housing consumption, but the post-2008 recession failed to gain significant tailwinds from housing, Federal Reserve Vice Chairman Janet Yellen said Monday.

In fact, housing overall became much less of a stimulus in the years following the subprime-market bust, the vice chair concluded when speaking at the “A Trans-Atlantic Agenda for Share Prosperity” conference in Washington D.C.

“After a lengthy recession that imposed great hardships on American workers, the weak recovery has made the past five years the toughest that many of today’s workers have ever experienced,” Yellen added.

An important tailwind in most recoveries is housing because residential investment creates jobs in construction as well as related industries, Yellen said. 

Before the Great Recession, housing investment added a half of a percentage point on average to real Gross Domestic Product (GDP) growth in the two years after each of the previous four recessions. This was considerably more than its contribution to growth at other times, the vice chairman noted.

“During this recovery, in contrast, residential investment, on net, has contributed very little to growth since the recession ended,” Yellen stated. “The reasons are easy to understand, given the central role that housing played in the Great Recession.” 

An extended boom in construction was driven in large part by overly loose mortgage lending standards as well as unrealistic expectations of future home price increases, leading to a housing market collapse complete with plunging home sales and housing prices as well as a sharp credit contraction, according to Yellen.

Thus, tight mortgage credit conditions are still making it difficult for potential homebuyers, despite record-low mortgage interest rates, creating housing affordability.

“I’m encouraged by recent improvement in the residential sector, but the contribution of housing investment to overall economic activity remains considerably below the average seen in past recoveries,” Yellen said.

Click on the graph to view the average contribution of residential investment to real GDP growth during past recoveries.


The collapse in house prices additionally resulted in a huge loss of household wealth. Net home equity is down $5 trillion, or 40%, from 2005, weighing on the finances and spending of homeowners, Yellen noted.

“Households are less able to tap their home equity to deal with economic shocks, fund their children’s education, or start new businesses. For some households, the collapse in house prices has left them underwater on their mortgages, and thus less able to refinance or sell their homes,” Yellen said.

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