One of the key reasons for the sluggish recovery has been the ongoing problems in housing. Usually residential investment (RI) is a major contributor to GDP growth in the early stages of a recovery, but not this time because of the huge overhang of existing vacant homes.
Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker’s commissions, and a few minor categories.
Photo: Calculated Risk
This graph shows RI and investment in single family structures as a per cent of GDP. Usually RI rebounds strongly at the beginning of a recovery, but this time RI has continued to decline.
RI as a per cent of GDP is at a post WWII low of 2.22%, and investment in single family structures is near the all time low.
Some people have asked how a sector that only accounts for 2.2% of GDP be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery. We can see this by looking at housing starts and the unemployment rate.
Photo: Calculated Risk
This graph shows single family housing starts (through October) and the unemployment rate (inverted) through November. Note: Of course there are many other factors too, but housing is a key sector.
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) rebounded a little last year,and then moved sideways for some time, before declining again in May.
This is what I expected when I first posted the above graph in August 2009. I wrote:
[T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think … a rapid decline in unemployment is also unlikely.
I’m now looking at a 2011 forecast for housing, and the good news is RI should increase modestly next year. It will not be a vigorous recovery, but I do expect RI to make a positive contribution to GDP – and that is an improvement, and is one of the reasons I think real GDP growth in 2011 will be 3%+. Not great, but an improvement over 2010.
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