Federal Reserve Board Chairman Ben Bernanke told Congress yesterday that he didn't think that the economy would experience a recession. He also claimed that the collapse of the housing market could fuel inflation by pushing up rents. It would have been useful if the media had provided some background for these assertions. As far as Mr. Bernanke's assessment of the risk of a recession due to the collapse of the housing bubble, it is worth reminding readers that Mr. Bernanke consistently denied that there was a housing bubble. Even when the bubble began to collapse last year, and the write-offs in the subprime market first began to hit bank's balance sheets, Bernanke insisted that the problems in the housing market would only cause minor problems in financial markets. In short, Mr. Bernanke completely overlooked the housing bubble as a potential source of instability and consistently underestimated the risks it posed even as it began to collapse. Readers would find this background useful in assessing Mr. Bernanke's most recent reassurances. On the link between inflation and the housing crash, Mr. Bernanke argued that if people who are reluctant to buy homes opt instead to rent, this could push up the price of rental housing, thereby contributing to overall inflation. The problem with this analysis is that it ignores the fact that many unsold ownership units end up as rentals. If the switch from owning to selling is driving up rents by creating a shortage of rental housing, then we should see growth in the number of vacant ownership units. While the percentage of vacant rental units did in fact rise to a record 2.8 percent in the first quarter of 2007 (it had never exceeded 1.9 percent before the current downturn), it has remained pretty much constant over the last year. This implies that the switch from owning to renting is being matched by the number of ownership units being converted to rental units, leaving little net change in the demand for rental units.
--Dean Baker
