Housing Nearly 17% of GDP

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Thanks to a surge in residential investment during 2020, housing’s share of GDP remains elevated compared to recent years. Last year’s market conditions involved a renewed focus on the importance of home, an evolving geography of housing demand, and a lack of for-sale inventory. Housing will continue to expand in 2021, although as the rest of the economy recovers, the housing share of the economy will taper.

For the second quarter of 2021, overall GDP growth came in at a lower than expected but still strong 6.5% seasonally adjusted annual rate. Residential fixed investment (home building and remodeling) declined at a 9.8% annualized rate, after three strong quarters of growth, including a 59.9% growth rate during the third quarter of 2020.

During the second quarter of 2021, housing’s share of GDP stood at 16.9%, somewhat off a 14-year high.

For the second quarter, the more cyclical home building and remodeling component – residential fixed investment – was effectively unchanged at 4.7% 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. Moreover, the U.S. continues to experience a deficit of single-family housing.

 

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 second quarter, RFI was 4.7% of the economy, recording a $1.07 trillion 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 second quarter, housing services represented 12.1% of the economy or $2.8 trillion on seasonally adjusted annual basis.

Taken together, housing’s share of GDP was 16.9% 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.



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