Housing has staged a dramatic turnaround since the spring. Due to low mortgage interest rates, a renewed focus on the importance of home, an evolving geography of housing demand, and a lack of for-sale inventory, the housing sector has been a relative bright spot for the economy.
For the third quarter, overall GDP growth rebounded at a 33.1% seasonally adjusted annual rate. Residential fixed investment (home building and remodeling) expanded at a 59.3% annual rate. Overall growth will be slower in the fourth quarter.
As a result of the historic third quarter numbers, housing’s share of GDP remains elevated. In the second quarter of 2020, due to broader economic weakness, the housing share of GDP was more than 16%. As the rest of the economy recovered during the third quarter, the housing share declined somewhat, coming in at 15.5% of GDP. Nonetheless, except for the historic second quarter, this is the highest share for housing since the summer of 2008.
For the third quarter, the more cyclical home building and remodeling component – residential fixed investment – increased to 3.5% of GDP, with a 59.3% annualized growth rate, as noted above. Housing gains will continue as the consequences of the virus crisis are likely to lead to a reversal for declining home size trends, a greater need for additional home office space, and more working from home.
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, 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.
For the third quarter, RFI was 3.5% of the economy, recording a $642 billion seasonally adjusted annual pace (measured in inflation adjusted 2012 dollars). This was the highest reading since 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.
For the third quarter, housing services represented 12% of the economy or $2.2 trillion on seasonally adjusted annual basis.
Taken together, housing’s share of GDP was 15.5% for the quarter.
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. However, the housing share of GDP lagged during the post-Great Recession period due to underbuilding, particularly for the single-family sector.