Housing–losing its importance as an economic driver

Quite frequently, I’ve heard many wonder how the U.S. economy could enter a more robust phase if housing continues to languish?

Isn’t housing one of the pillars that support economic activity?  And besides, isn’t housing usually a leading indicator that pulls the economy out of a recession?

It typically is, and I must confess that I have also postulated that it would be difficult for the U.S. recovery to enter a more robust and permanent phase without any participation from housing.  But that is apparently what is happening.



Let’s look at the chart above, which provides us with a clear look at residential investment and its contribution to GDP going all the way back to the first quarter of 1947, when the government first released quarterly GDP data.

The bull market in residential spending/construction that began in the early 1990s at just over 3% peaked in 4Q2005 at 6.26%, helping to fuel overall output in the U.S.

But what we saw in housing during much of the last decade was what I like to call a “false prosperity” because it was fueled by easy money, speculation and overbuilding and not by true aggregate demand.

And the housing industry (and the rest of us) has been paying the price ever since in falling home values and a near implosion of the financial sector that nearly wrecked the U.S. and global economy.

But now that housing accounts for just 2.25% of GDP - a sharp four percentage points below the recent peak! – it doesn’t have near the ability to dent total output like it once could a few short years ago.

That’s not to say that further weakness in new home construction caused by a shadow inventory that competes with builders might not modestly detract from growth, but housing’s influence on GDP has waned and other sectors have begun to fill the void.

On the flip side, we are now well below the 60+ year average of 4.70% so it seems more likely that falling unemployment and a loosening of tight credit standards might just eventually set a new cycle in motion and allow housing to underpin activity.