UPDATED: February 20, 2023

The central argument we make in our book is that the housing bust in combination with excessive household debt burdens were the key drivers of the economic downturn. Failure to more adequately address the housing disaster was the greatest policy mistake made in the Great Recession.

One way to see the scars of the housing bust is to look at the unemployment rate today in counties that saw the biggest decline in house prices. As we argue in the book, such an approach actually significantly underestimates the impact of the house price-driven spending collapse. This is because even people living in areas that were not hit by housing lost their jobs when people living in areas where house prices crashed stopped buying goods. But even with this under-estimation, here is the picture we get:

The unemployment rate in counties hit hardest by the housing crash is more than 3% higher in 2013 relative to 2006. The rise in the unemployment rate is twice as high as the rise in counties with the smallest decline in house prices. The housing crash has led to a large and persistent increase in unemployment. Unemployment leaves many indebted Americans between a rock and a hard place because they cannot pay down their debt and must get help to settle debts. The evidence is undeniable.

This patterns is supported by evidence presented today by Steve Matthews and Jeanna Smialek of Bloomberg, who write:

“Residents of the U.S. states that suffered the steepest home price declines and record foreclosures face labor markets that remain impaired five years after the most severe recession since the 1930s ended.”

You can look at this pattern and make a number of arguments. Perhaps these counties were artificially inflated in 2006 by the housing bubble. Perhaps these counties will never return to their pre-crash employment levels. Perhaps government policy is keeping people from moving out of these counties when people need to relocate.

But the chart above forces you to recognize the centrality of housing in thinking about the employment problems we have today.