Did Declining Productivity Kill House Prices

"Productivity Swings and Housing Prices" by James A. Kahn, the Henry and Bertha Kressel Professor of Economics at Yeshiva University; he was a vice president in the Macroeconomic and Monetary Studies Function of the Federal Reserve Bank of New York when the article was written.

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate....

Conclusion
This article argues that the current housing crisis stemmed in large measure from a change in economic fundamentals and was only exacerbated by credit market conditions. Indeed, what appear in retrospect to be relatively lax credit conditions in the early part of this decade may have emerged in part because of then-justifiable, although ultimately misplaced, optimism about income growth. The subsequent credit crunch can be traced at least in part to a productivity slowdown that began in 2004 but was likely not recognized until 2007. With the slowdown in productivity came a slowdown in the growth and expected future growth of income, which helped to stifle the housing boom and jeopardize mortgages and other investments predicated on ongoing growth. Thus, the U.S. housing sector served as the proverbial “canary in the mineshaft,” providing the earliest indication of a deterioration in underlying economic conditions.

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