The Official Online Weekly Newspaper of NAHB
Housing — which has consistently led the way to higher ground following economic recessions in the U.S. at least since the 1960s — won’t be playing that role this time as the economy emerges from its worst slump since the Great Depression of the 1930s, according to new research on housing and the gross domestic product (GDP) from NAHB’s Housing Economics.
“There are indications that housing is providing weaker support to economic growth in this cycle, with residential fixed investment (RFI) and GDP returning to positive growth in the third quarter of 2009,” writes Peter Grist, the author of the study.
“Further, housing starts are still at unprecedentedly low levels and will experience several years of recovery before returning to normal levels,” he says. “Unlike past economic recoveries, housing construction will grow alongside other sectors rather than leading the recovery.”
In the first half of 2004, when the nation’s economy was growing strongly at a rate of more than 4%, housing construction was well above the long-term average rate of the prior two decades and residential fixed investment was growing at an annual pace of more than 10%, the report says.
That surge began to unravel at the end of 2005, when a progressive decline in housing affordability resulting from an uncharacteristically sharp climb in home prices in key markets began putting downward pressure on those prices. As house prices continued to decline, housing construction plummeted and RFI dropped almost 75%.
“The fall in house prices led to a sharp increase in mortgage delinquencies and foreclosures,” the study says. “This put significant stain on financial markets, leading to the near collapse of the banking sector” and 6.4% shrinkage in GDP at the trough of the cycle in the first quarter of 2009.
Residential fixed investment includes the construction of new single-family and multifamily houses, manufactured housing (or mobile homes) and home improvements. Also included are brokers’ commissions on sales, net purchases of used structures and residential equipment.
From a historical peak of 2.27 million units at a seasonally adjusted annual rate, housing starts plunged to a low of 488,000 units at the bottom of the trough in January 2009, a decrease of almost 80%.
“While housing construction has recovered slightly to 591,000 units in January of 2010, it is still at a level not seen since detailed records began to be collected in 1959,” the report says. “With the dramatic decline in housing starts, residential fixed investment fell sharply, down 54% from a peak of $775 billion or 6.1% of GDP in 2005, to a low of $359 billion (in 2005 dollars), or 2.8% of GDP in 2009.
Single-family home building, which is responsible for more than half of the value of RFI, fell from $434 billion worth of annual construction at the peak of the housing cycle, or 3.4% of GDP, to $109 billion in 2009 and a contribution to GDP of only 0.8%.
The value of multifamily construction peaked at $48 billion — or 0.37% of GDP — in 2006, and subsequently lapsed to $26 billion in 2009, at 0.2% of GDP.
The study identifies home improvements, refurbishment and remodeling of residential structures as the second largest component of residential fixed investment, typically contributing around a quarter of its value.
“Despite the sharp reduction in housing construction, investment in home improvements has experienced only a modest decrease from $164 billion (1.3% of GDP) in 2005-2006 to $148 billion (1.1% of GDP) in 2009. As a result, its share of residential fixed investment increased to almost one-third in 2009,” the study says.
By comparison, housing services have proven to be a highly stable component of the U.S. economy, the report says.
“In the past three years, despite the boom and bust in the United States economy and housing sector, housing services have experienced only a small reduction in value and their overall contribution to GDP,” according to the NAHB research. This lack of volatility largely can be explained by the size of the existing housing stock — 129.7 million units in June 2009 in the estimation of the Census Bureau — compared to only a 1.2% annual rate of the stock’s expansion, with new construction averaging around 1.5 million units per year.
Housing services include:
- The imputed value of owner-occupied rents, which were almost $1.1 trillion in 2009, or 8.4% of GDP.
- Rent from tenant-occupied housing, which in 2009 was valued at $295 billion and contributed 2.3% of GDP.
- Household utilities — such as water supply and sewage, garbage collection, electricity and gas. In 2009, household utilities were valued at $249 billion, or 2% of GDP.
- Total housing services were valued at $1.66 trillion in 2009, representing 18% of personal consumption expenditures (which comprise around 70% of GDP) and contributing 12.8% of GDP.
To read "Housing and GDP" in its entirety, click here.
For more information, e-mail Peter Grist at NAHB, or call him at 800-368-5242 x8697.
The 2010 Spring Construction Forecast Conference is now a two-hour webinar to be held from 2:00-4:00 p.m. EDT on Tuesday, May 18.
Mark Zandi, of Moody’s Analytics, and Chris Varvares, of Macroeconomic Advisers, will join NAHB Chief Economist David Crowe for a macro-level look at the state of the nation’s economy and its impact on housing.
To register, visit www.nahb.org/cfc.