Mean Street: Don’t Be Brainwashed by the Housing Cult

It’s one of my favorite truisms that you can never be too cynical about Wall Street or Washington.

But after watching Bob Toll, CEO of Toll Brothers on CNBC this Monday, I’ll be adding home builders to that esteemed list.

On CNBC, Toll was at it again, exhorting the Fed to keep pumping billions into housing because new home construction “employs through direct and corollary basis about 20-25% of all the jobs in the country.”

That’s right. Bob Toll apparently thinks 30 million Americans derive their daily wage from the home building industry.

But here’s the thing. Bob Toll is wrong. That number is wrong. And our nation’s ongoing obsession with new home construction is also wrong.

Now, I’m not saying that housing doesn’t matter to the economy. It matters a lot. Home prices keep everything from bank balance sheets to consumer confidence afloat. Without the TARP or the Fed tossing us a $1.25 trillion mortgage life raft, we’d all be drowning right now.

But building new homes is a different matter. Yes, it can quickly create jobs, wages and profits, but it can just as quickly take them away. Just ask the residents of Las Vegas or South Florida.

I was curious to see just how “essential” homebuilding was to the current U.S. economy, so I did a little homework with government figures and the excellent Calculated Risk blog And here’s what I found:

Currently U.S. GDP stands at around $14.5 trillion, yet residential construction spending accounts for only a measly $270 billion.

Currently U.S. GDP stands at around $14.5 trillion, yet residential construction spending accounts for only a measly $270 billion.

1.9%! But I suspect there is a lot more in the DIY industry. Both our local Home Depot and Lowes have plenty of customers there everytime I go in and hiring signs out. Maybe it is just the Pittsburgh area, but a lot of people tell me when the economy sucks, people put more work and material into improving where they live.

Capital goods fall into two broad categories: production and consumption. I may not be using the proper economic terms.

Production goods are things like computers (used for business), factories, machinery, etc. When money is invested in them, it creates a return by generating new revenue. They are used to create new goods and services.

Consumption goods are things we use for enjoyment or comfort, but which aren’t used to create new wealth. Examples include housing, personal automobiles and computers, artwork, etc.

Enormous confusion has been created in the economy and in people’s minds by confusing these two categories. When money is invested in commercial real estate, machinery, and other production goods, it is used to generate new production. While efficiency of the investment varies, there is some inherent value of the investment based on the new income it generates.

When money is invested in consumption capital goods, it becomes static. Any potential return on investment is based not on what the item purchased generates in revenue, since it doesn’t generate any, but on the “greater fool” theory. Some person in the future will be willing to pay even more for the item. As we have recently learned with regard to housing, this is not always the case.

In some sense, only money invested in production goods is actually an investment.

I have moved into a new development. Everyone was buying a house at the same time on our cul de sac. There were four babies born within weeks of each other, all concieved right after we moved. (I had one). This is over 50% of the cul de sac. I saw this phenomenon again, when my husband had to move for a new job, and we bought another new home in a new development. I had my second baby, then. Something about moving into a home makes women have babies, I guess. We finally have the room, etc.

Childless couples who buy a home start having babies. Couples with one child generally have more.

If you don't believe babies can fuel the economy you haven't been to Babies R Us. Just look at the garbage day leavings of new parents, all the new baby stuff boxes: stroller, high chair, bed, car seat, etc., etc., etc.

Oh, and it doesn't end when they are no longer babies. My oldest is now at the 100 dollar tennis shoe stage.

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