Housing is an important source of economic growth. As of the first quarter of 2014, housing’s share of gross domestic product (GDP) was 15.5%, with home building yielding 3 percentage points of that total.
Housing-related activities contribute to GDP in two basic ways.
The first is through residential fixed investment (RFI). RFI is effectively the measure of the home building and remodeling contribution to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes and brokers’ fees. For the fourth quarter, RFI was 3% of the economy.
While the first quarter of 2014 was the fourth strongest level of RFI after the Great Recession ($482 billion annualized pace), the slowing of the rate of growth for home building was a drag on quarterly GDP growth. This was the second consecutive quarter of drag after 12 straight quarters of boosting economic growth. Nonetheless, the trend in recent quarters indicates that RFI is growing faster than the economy as a whole. For example, over the last two years, the quarterly annualized measure of GDP has grown about 3.7%, while RFI is up 15.5%.
The second impact of housing on GDP is the measure of housing services, which includes gross rents (including utilities) paid by renters, and owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) and utility payments. The inclusion of owners’ imputed rent is necessary from a national income accounting approach because without this measure increases in homeownership would result in declines for GDP. For the fourth quarter, housing services was 12.5% of the economy.
Historically, RFI has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP. These shares tend to vary over the business cycle.