Housing and the Recovery

Much of the recent news on housing is more upbeat.  The National Association of Home Builders sentiment survey marked  another gain in the last report, housing starts are advancing and more home price indices, including S&P/Case-Shiller, are seeing gains. Some analysts are even arguing that the bottom is behind us and its up from here.  Even some of the disappointing reports have silver linings — new home sales were down in the most recent report for June but included a substantial upward revision for May.

Despite this better news, many still point to the lackluster recovery as a factor in the housing market.  However, some of softness in the overall economy may be due to housing. In most recoveries, residential investment — economists speak for building homes — powers the recovery. The table gives a summary of the recoveries dating back to the deep recession of 1981-82 and shows how much residential construction and GDP rose in the fiorst 11 quarters after the recession bottom. Data are percentage changes in real — inflation adjusted — terms.   Until this recovery, residential investment grew roughly three times faster than overall GDP; this time housing is lagging GDP gains.  The problem this time is not interest rates and the cost of money since rates plummeted in 1981-82 and are at record lows today. Indeed, recent news points to strong activity in refinancing mortgages.  One big difference this time is the financial crisis. While the 1981-82 downturn saw unemployment almost as high as in the last few years, the economic damage was not concentrated in the financial sector.

Recent published at the Cleveland Federal Reserve Bank looks at whether deep recession lead to fast or slow rebounds.  Their analysis suggests that financial crises and housing together are negatives for the recovery — either one along hurts but both together hurt more.

Recession Residential Investment GDP 
1981-82 58.4% 17.5%
1990-91 36.0% 8.7%
2001 26.7% 8.0%
2007-2009 4.8% 6.7%

Source: US Bureau of Economic Analysis and Bloomberg

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  1. [...] Much of the recent news on housing is more upbeat.  This article looks at residential investment and historically correlates it wil the slow recovery.  [...]

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