Residential Fixed Investment Reaches Near-Decade High

Final estimates of first quarter 2017 GDP growth (revised up two-tenths of a percentage point to 1.4%), show that housing’s share of gross domestic product (GDP) was unchanged at 15.6%.

The home building and remodeling component—residential fixed investment (RFI)—increased 0.1 percentage point to 3.6% as a share of GDP.  The first-quarter expansion of RFI added 0.48 percentage point to the headline GDP growth rate (i.e. GDP would have expanded only 0.9% had RFI remained unchanged).  Of the 31 quarters since the end of the Great Recession, only five times has residential fixed investment contributed more to GDP than it did in Q1 2017.

Housing-related activities contribute to GDP in two basic ways.

The first is through RFI—effectively the measure of the home building, multifamily development, and remodeling contributions to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes, and brokers’ fees.

RFI comprised 3.6% of the economy in the first quarter of 2017.  In nominal terms, RFI rose from a $596 billion seasonally adjusted annual rate (SAAR) to $614 billion in inflation-adjusted 2009 dollars—a 3.1% increase.  This represents the highest level of real RFI (SAAR) in nearly a decade (Q3 2007).

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.  In the first quarter, housing services comprised 12.0% of the economy or $2.03 trillion (SAAR), falling 0.1 percentage point from the fourth quarter of 2016.
 

Taken together, housing’s share of GDP was 15.6% in the first quarter.

RFI and housing services have averaged 4.6% and 13.2% of GDP, respectively, over the past 35 years for a combined 17.9% of GDP. These shares tend to vary over the business cycle. RFI as a share of the economy, for instance, has risen 33% (from 2.6% to 3.6%) since the end of the Great Recession.



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