Eye On Housing
Housing has staged a dramatic turnaround since the Spring of 2020. 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 fourth quarter, overall GDP growth continued a recovery at a 4% seasonally adjusted annual rate. Residential fixed investment (home building and remodeling) expanded at a 33.5% annualized rate, after a blockbuster 63% rate of growth for the third quarter.
As a result of the 2020 virus crisis, 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 18%. As the rest of the economy recovered during the third quarter, the housing share declined somewhat, coming in at 17.5% of GDP. For the fourth quarter, housing’s share of GDP increased to 17.7% as single-family construction accelerated.
For the fourth quarter, the more cyclical home building and remodeling component – residential fixed investment – increased to 4.6% of GDP. Home construction will continue to expand 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 fourth quarter, RFI was 4.6% of the economy, recording a $984 billion seasonally adjusted annual pace.
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 represented 13.1% of the economy or $2.8 trillion on seasonally adjusted annual basis.
Taken together, housing’s share of GDP was 17.7% 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. The recent expansion in housing activity has increased these shares to near historic norms.
A data note: as of December 2020, NAHB returned to estimating GDP in nominal terms for this calculation. For a period of time prior to December 2020, estimates were based on 2012 chain-weighted dollars. Nominal calculations provide a better apples to apples comparison for the GDP line items used to estimate the housing share of GDP.
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