We Told You That Housing Was Going To Boost The Economy — But We Had No Idea It Could Be This Big

We’ve written a couple of posts lately about the likely economic tailwind coming from more economic recovery.

This weekend we wrote about the Balance Sheet Recovery, the notion that the ongoing reversal of the Financial Crisis/household deleveraging will provide a boost that should last for a while.

This morning we noted that the booming Homebuilder Sentiment number was a sign that construction would grow, and that housing would make an increasing contribution to GDP.

So how big of a boost are we looking at?

In a note, Deutsche Bank economist Joe LaVorgna explains gives some numbers:

As shown in the chart below, the homebuilders’ sentiment index is highly predictive of housing starts with a lead on the former of approximately six months. The correlation between the two series is over 90%. Based on history, the current 46 level of the NAHB index is consistent with annual housing starts of roughly 1.6 million units at an annual rate. This is roughly double the current 0.745 million year- to-date average and still well above September’s 0.872 million rate. Thus, construction activity has significant upside potential even if homebuilder sentiment levels-out, which does not appear likely. If the pace of housing starts increases over the next year by the amount that builders’ sentiment implies, then the contribution from residential construction in the GDP accounts should double, as well. The year-to-date contribution to real GDP has been 30 bps per quarter. This should increase to 60 bps per quarter next year given the scenario highlighted above. Additionally, higher consumption of housing-related services coupled with the indirect effects from home price appreciation (i.e., wealth effects) could easily raise the housing contribution to one full percentage point. In short, housing could provide a meaningful (and critical) lift to overall economic activity at a time when other growth drivers, like exports, are slowing.


Photo: Deutsche Bank

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