Thanks to a surge in residential investment during 2020 and ongoing strength in 2021, housing’s share of GDP remains elevated compared to most of the post-Great Recession period. Due to the pandemic, market conditions evolved with a renewed focus on the importance of home, a shifting geography of housing demand, and a lack of for-sale inventory. Housing continued to expand in 2021, although as the rest of the economy recovered, the housing share of the economy has tapered.
For the fourth quarter of 2021, overall GDP growth came in at a 6.9% growth rate, driven by inventory investment. Residential fixed investment (home building and remodeling) was effectively flat.
During the fourth quarter of 2021, housing’s share of GDP stood at 16.4%, somewhat off a 14-year high of 17.8% during the second quarter of 2020.
For the fourth quarter, the more cyclical home building and remodeling component – residential fixed investment – dipped 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. Moreover, the U.S. continues to experience a deficit of single-family housing. However, higher interest rates due to tightening monetary policy will increase housing affordability challenges reducing momentum for single-family construction.
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 $1.11 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 fourth quarter, housing services represented 11.8% of the economy or $2.8 trillion on seasonally adjusted annual basis.
Taken together, housing’s share of GDP was 16.4% 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.