Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.
For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a per cent of GDP.
When I posted that graph, the bottom wasn’t obvious to everyone. Now it should be, so here is an update to that graph.
Photo: Calculated Risk
The arrows point to some of the earlier peaks and troughs for these three measures.
The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom – something a number of us predicted given the overhang of existing vacant housing units.
Now the question is: How strong will the recovery be? (I think it will be somewhat sluggish compared to previous recoveries).
Housing plays a key role for employment too. Here is an update to a graph I’ve been posting for a few years. This graph shows single family housing starts (through June) and the unemployment rate (inverted) also through July. Note: there are many other factors impacting unemployment, but housing is a key sector.
Photo: Calculated Risk
You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn’t hold.
Housing starts (blue) increased a little in 2009 with the homebuyer tax credit – and then declined again – but mostly starts moved sideways for two and a half years and only started increasing last year. This was one of the reasons the unemployment rate has remained elevated.
Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation – and that leads to even more demand for housing units – and more jobs, and more households – a virtuous cycle that usually helps the economy recover.
However, following the recent recession with the huge overhang of existing housing units, this key sector didn’t participate. Going forward I expect housing activity to increase and help push down the unemployment rate. Unfortunately I expect the housing recovery to be somewhat sluggish.
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