In past US economic cycles residential investment gave a big boost to the early stages of recovery. Not this time.
Nearly three years into the expansion, the net contribution of the housing sector to real GDP is exactly zero. However, the data is beginning to stir and, critically, homebuilders could be starting to build.
Each month, the National Association of Homebuilders surveys its members about current housing conditions. The responses are then tallied into an index that is published jointly with Wells Fargo.
A reading above 50 indicates that homebuilders report current conditions as being good or fair. The Housing Market Index has been below 50 for nearly six years, a record stretch of homebuilder pessimism.
The bleak outlook that homebuilders have reported in recent years is mirrored in the data. Housing starts have a strong correlation with sentiment of 0.7, according to the NAHB, and have been languishing at multi-decade lows. The stock of new houses has correspondingly plunged to the lowest in history. With supply so low, even a modest pick up in sales activity could translate in shortages of new houses in at least parts of the country. Homebuilders appear to see that turn in the data beginning to unfold.
According to the NAHB, homebuilder sentiment can lead major turning points in housing starts by four to six months. For instance, sentiment peaked during the boom in June 2005 and starts rolled over exactly six months later. During the bust, homebuilder sentiment had bottomed by January 2009 but bounced along the bottom for the next two years.
At long last, however, homebuilder sentiment is turning up, with the index doubling in just the last six months. There have been periodic upticks in this series ever since the bubble burst but nothing of the magnitude now seen in the data. Two of the line items within the survey are just as striking: “traffic of prospective homebuyers” and “expectations of sales in six months” have also doubled. The surge in homebuilder sentiment could be a harbinger of a similar acceleration in housing starts that begins to unfold through the rest of this year.
Economists predict the US economy will grow 2.4% in 2012, according to a recent survey by the Wall Street Journal, which is about the same as the 2.3% they were expecting six months ago just before the renewed strength in the housing data. They might need to start upgrading their forecasts. Residential investment usually marks the start of an economic cycle, on average accounting for one eighth of real GDP growth in the first 10 quarters of post-war expansions. By coming late this time, residential investment could mean that the later stages of this cycle last longer and are stronger than the consensus expects.