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The Relative Price Of Housing And Subsequent GDP Growth In The USA

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The Angry Bear

By Robert Waldmann

The great recession of 2008-09 followed an extraordinary house price bubble. The sluggish growth was characterized by a very slow recovery of residential investment. Oddly, the extensive revision of macroeconomic models, which implied a very low probability of great recessions has not involved a focus on housing. Instead, it has focused on financial frictions - essentially, it is assumed that the 2008-09 recession was extraordinary because a major financial crisis occurred.

Dean Baker dissents (as he often does) arguing that the severity of the recession could have been predicted given the massive decline in housing prices and earlier estimates of the effect of home equity on consumption. This note attempts to being to assess that claim. It also asks if it is possible to forecast GDP growth over the medium term. Finally, it is part of the Rip Van Keynes series, because I will use an empirical strategy, which has been out of fashion for at least four decades - basically an ad hoc OLS regression (sometimes I even include an exponential trend).

The basic result is that if the relative price of housing is high (compared to an exponential trend) then GDP growth over the following 5 years is low (compared to an exponential trend). Aiming to test out of sample forecasting, I start using 20th century data only.

-7.52 is a fairly impressive t-statistic.

Lnindex L20 is the logarithm of the ratio of the all transactions house price index to the consumer price index lagged 20 quarters. Gdp5 is the growth of the logarithm of real GDP over the past 5 years. Quarter is the calendar quarter up to the 4th quarter of 1999 = 1999.75. The data were downloaded from Fred and are described in what might be generously considered a sort of data appendix. One point must be mentioned

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In 2010 24/7 Wall St. named Angry Bear among the top twenty independent financial blogs on the net. Quote: "The Angry Bear www.angrybearblog.com. Half a dozen professionals, including a tax law expert, a historian, PhDs in economics, business consultants and financial professionals provide perspectives on the financial world. Despite their expansive coverage of economic issues, their articles are as deep as their coverage is extensive. Topics include world trade, industrial production, U.S. Government programs, and major regulatory issues." 2010 FINS from The Wall Street Journal named Linda Beale's Ataxingmatter in The Top Five Tax Accounting blogs to read for 2009-2010. Our current economists are Mike Kimel, Spencer England, Robert Waldmann, and Rebecca Wilder. Linda Beale is an expert in tax law and matters related to taxes. Ken Houghton has expertise in finance. Bruce Webb has added his expertise in particular on Social Security. Daniel Becker brings a small business perspective to his writing. Daniel Crawford: aka Rdan and Angry Bear blog Bios in alphabetical order: Linda Beale: I am a law professor at Wayne State University Law School who teaches various courses in the area of federal income tax, such as introduction to federal income tax, corporate taxation, partnership taxation, international taxation and perhaps in the future a course in statutory interpretation focussed on tax. Daniel Becker: I have two businesses: a practice in the health care field and a retail business of flowers and plants. I have served as an officer of 2 non-profits and my state society. I have testified before my state legislature. I have personally won in my state supreme court. Ken Houghton: A principle in his own company and former economist for several major financial companies. Spencer England: Before I started my own consulting business I was an economist for the CIA for 10 years and worked for a couple of Boston investment management firms as their in house economist, investment strategist for some 12 years. My original field of study was international economics and international finance. I celebrated the 20th anniversary of publishing SEER -- my equity strategy product. I model the S&P industries and advise portfolio managers on how to structure their portfolios by recommending industry weights. Mike Kimel: Formerly an economist for a Fortune 500 company and now an economist for a private corporation and author of Presimetrics blog and the book Presimetrics: How Democratic and Republican Administrations Measure Up on the Issues We Care About to be published August 2010. The book can be pre-ordered. RobertWaldmann: I have a PhD in economics (Harvard 1989) and teach economics at the University of Rome "Tor Vergata". Oddly, I don't blog much at my own site rjwaldmann about economics or Italy. As an economist (roughly) I am interested in behavioral economics, growth, and the economics of inequality. Actually much of my current research, such as it is, is really in econometric methodology and statistics. I was very unorthodox in the 80s, but the orthodoxy is much less rigid now. Bruce Webb: is a current member of the National Academy of Social Insurance (NASI). I am by training a historian who then has spent my working career in information retrieval and land use regulation. My interest in Social Security arose when I noticed in passing that the dates related to 'crisis' were moving but that nobody seemed to be noticing that and still less asking the key questions 'why?' and 'can this go on?' Rebecca Wilder: After receiving my Doctorate in Economics, I was an assistant professor for two years. However, I realized that teaching just wasn't for me and took a job in private sector. Now, I am an Economist in the financial industry. As an economist in finance, I analyze data, write commentary, and offer economic insight to traders, chiefs of staff...

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