Eye on the Economy: Will Housing Lead or Follow in a Slow-Growth Economy?


*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

Job creation and economic growth have been weak in 2012. While gross domestic product (GDP) and total employment have expanded, their respective rates of growth have been disappointing given the high unemployment and prior wealth declines connected with the Great Recession.

Despite ongoing negative economic news, housing and home building stand out as sources of positive developments. However, some analysts have questioned whether the good news for housing can continue in the face of slow growth, the impending fiscal cliff, and continuing financial crises in Europe.

It is useful to remember that housing typically leads the economy out of recession. As interest rates fall, home building can have an outsized impact on GDP growth. And as employment growth continues (even if slowly), interest rates remain low and credit access improves, housing demand will continue to expand, yielding a virtuous cycle of benefits for both housing and the overall economy.

For these reasons, we believe that housing and the home building sector will continue to expand, albeit at a rate that is slower than history would suggest is normal for a recovery.

Overall, growth of real GDP slowed, falling from a 2% growth rate for the first quarter of the year to only 1.5% for the second quarter. A primary reason was a decline in the rate of growth of personal consumption expenditures (PCE), which fell from 2.4% to 1.5% from the first to second quarter. The decline in PCE also resulted in an increase in the personal savings rate, which has been declining fairly consistently since the beginning of 2011 as household balance sheet repair progressed.

As other components of GDP slow their growth, the role of home building becomes increasingly important. Residential fixed investment constitutes approximately 2.7% of GDP but has provided an outsized contribution of economic growth in 2012. For the first quarter, home building added 0.4 percentage points to real growth, or 22% of the total. For the second quarter, home building generated 0.2 percentage points of growth, or 14% of the total.

Recent employment reports have reflected the trend toward slower growth. Data from the Bureau of Labor Statistics (BLS) indicated that 163,000 net jobs were added for the month. While this is still less than what is needed for an economy with an 8.3% unemployment rate, the July number was an improvement after three consecutive months of below 100,000 job growth.

Data from the BLS Job Opportunity Labor Turnover Survey (JOLTS) suggest that a continuing disconnect exists between open jobs and available job seekers. Since 2010, the job openings rate has consistently risen, from about 2.2% of total employment to 2.7%. However, the hire rate has remained flat, suggesting that the employers are having a difficult time filling open positions, perhaps due to a skills gap or ongoing challenges in housing that are reducing population mobility.

The inevitable product of weak economic expansion and disappointing employment growth is sagging consumer confidence. While the Conference Board’s Consumer Confidence Index and the University of Michigan Consumer Sentiment Survey reported consumer confidence moving in opposite directions this month, the three-month moving average of both indexes reveal that consumer confidence has trended lower from multi-year highs over the course of the last few months. Weakening consumer confidence is a reason why PCE growth has declined in 2012. It may also be related to a small decline in the National Association of Realtors Pending Home Sales Index, which decreased 1.4% in June.

While declining consumer confidence and weak employment growth are downside indicators for short-term housing demand, NAHB Economics recently examined a long-run positive contributor: the impacts of immigration on demand for both owner-occupied and rental housing. The analysis found that net immigration is forecasted to add 3.4 million U.S. households, occupying more than 2 million multifamily units and 1.2 million single-family homes over ten years. This will add to demand for both owner-occupied and rental housing.

Thus, with improving macroeconomic conditions, particularly those that unlock pent-up housing demand, the ongoing regional improvements in housing markets can yield a housing-led economic expansion. As of August, 80 metropolitan areas are counted on the NAHB/First American Improving Markets Index, a conservative accounting of housing markets that demonstrate improvement with respect to local employment, housing prices and home building. The reading of 80 is down from 84 in July, but this total still represents about one-quarter of the nation’s metro areas.

In fact, more areas are likely to report improving conditions with respect to housing prices. Prices are up, according to the May Case-Shiller 10- and 20-city composite house price indexes, which both increased 2.2% from April to May. Moreover, the improvement was widespread, with all 20 metro components up, ranging from 0.4% in Detroit to 4.5% in Chicago on a non-seasonally adjusted basis.

Nationwide, the homeownership rate was unchanged for the second quarter of 2012, coming in again at 65.6% on seasonally adjusted basis, according to the Census Bureau. While this level remains near a 15-year low, declines in the rate itself may be coming to an end as a housing recovery takes hold in a greater number of locations.

The growing housing recovery is certainly evident in the Census Bureau’s construction spending reports. Private residential construction spending was up for the third consecutive month in June, reaching its highest level since early 2009 on nominal basis. According to the three-month moving average, residential construction spending has risen for each of the last nine months.

Construction spending on new single-family homes jumped 3% on a month-to-month basis and has staged nearly a 19% improvement from the same period a year ago. Multifamily construction spending increased 3.4% during June and has experienced gains in each of the last nine months. Overall, spending on new multifamily units has increased by 66% from its low point in August 2010.

Home improvement spending slipped on a month-to-month basis in June, continuing its see-saw pattern of the last several months. Remodeling activity has remained in a relatively tight range for the past two years. This reading of home improvement activity is also consistent with the NAHB Remodeling Market Index, which fell two points to 45 for the second quarter of 2012.

Despite the slowing of economic growth, recent policy statements from the Federal Reserve’s Open Market Committee offered no commitments to future rounds of quantitative easing, but instead reiterated its policy of keeping interest rates low through the end of 2014.

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