The horrible drop in new home sales that came in from the U.S. Census on Wednesday underlines the assertion of Princeton economist Atif Mian and the University of Chicago’s Amir Sufi.

That is, their assertion that the housing industry doesn’t have the depth or capacity to save the U.S. economy.

“Exactly a year ago from today, one of us wrote a short piece entitled ‘Will Housing Save the U.S. Economy?’ The conclusion was pessimistic,” the two say. “We need to temper our optimism on what a housing recovery can do…But we will not be returning to the boom years that preceded the Great Recession. The days when housing was the predominant force driving economic activity are gone…”

A year after their prediction, they seem to have hit the bulls-eye.

Dreadful new home sales data yesterday heightened concerns that house price growth will stall. but we are making a different point: the sensitivity of economic activity to rising house prices is much lower today than it was prior to the Great Recession. This is due to a number of factors, such as the rise in investor purchases and the fact that the households who would be most likely to spend out of housing wealth are no longer homeowners. In fact, rising rents may dampen economic activity.

Ironically, the fact that house price growth has not contributed much to overall economic activity over the past few years implies that the economic consequences of stalled house price growth may be small. Slower house price growth will lower new residential construction, but it has been pretty weak anyway. And cooling the rapid rise in rents may actually help boost spending on other goods. The bottom line is that the U.S. economy will have to look for an engine other than housing to drive growth going forward.


“What about the 2012 and 2013 period? There was a much smaller volume of cash-out refinancing. Despite home values rising more from 2011 to 2013 than from 2005 to 2006, homeowners took much less equity out of their homes compared to the earlier period,” the two write. “While this doesn’t directly measure spending, our research shows that almost all spending during the 2005 and 2006 period came out of active home equity withdrawal. So the fact that there has been very little cash-out refinancing in 2012 and 2013 tells us that there is likely very little spending out of housing wealth currently.”

Their conclusion?

“We think it is officially time to stop cheering for higher house prices. They aren’t having much of an impact on the economy anyway, and the resulting higher rents are hurting many,” they say.

Perhaps they’re onto something.