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The housing downturn has been one of the most stressful parts of the weak U.S. economic recovery. The goods news is that new home sales, permits, and starts are all beginning to recover, as are existing home sales. The bad news is that the recovery is from such a low base. Even so, the data suggest that a recovering housing sector will be a boost to U.S. GDP. In the first quarter of 2012, housing contributed 0.4 percentage points of the 2.2% GDP growth. As shown in the graph below, housing has often contributed a half to a full percentage point to GDP growth after deep slumps. This looks achievable in coming quarters if the euro doesn’t collapse. A rough approximation for housing’s expected contribution to GDP is the change in the number of starts — the bigger the increase in starts, the bigger the contribution to GDP. The rate of starts in the first quarter was 100,000 above the 2011 rate, providing a 0.4 percentage point contribution to GDP growth. In the 12 months through April, single-family starts were up 19% to 492,000 (reported as a seasonally adjusted annual rate). Multi-family starts were up a strong 63%. Single-family starts peaked at a 1,823,000 annual rate in January 2006 and then fell to a low of 353,000 in March 2009 before starting the gradual recovery we are currently witnessing. Because starts have been so weak in recent years, residential investment has declined to only 2.3% of GDP in the first quarter, versus 2.7% for autos. In the past, residential investment has always been a larger component of the economy than autos, at least since World War II, but it has now provided a smaller share of GDP than autos for seven consecutive quarters. In April, new home sales were up 10% from April 2011, reaching a 343,000 annual rate. By comparison, in 2005, 1,279,000 new homes were sold, while only 322,000 were sold in the 12 months through April. Comparing new home sales to the growing number of households shows a record low, with monthly sales at 0.3% of households versus a long-term average of 0.8%. Recently, sales have exceeded completions, pushing the inventory to all-time lows — only 146,000 new homes were in the construction pipeline in April, of which 46,000 were completed homes. This compares to lows of about 80,000 in previous construction troughs and a high of 199,000 completed homes for sale in January 2008. With inventories of new homes at record lows and sales increasing, we expect starts to continue making gains and providing a positive contribution to GDP. Building permits slowed in April from March, but March permits had been particularly strong, especially for multi-family. Over the past 12 months, building permits were up 24%, pointing to significantly stronger construction in coming months. Turning to existing homes, nationwide sales were up 10% year-over-year in April to a 4.62 million annual rate. The peak was in September 2005, at a 7.25 million annual rate, with the trough at 3.39 million in July 2010. Helping sales, affordability is at an all-time record due to the decline in prices and record low mortgage rates. However, credit conditions for mortgages are still tight. This has held down sales and pushed all-cash sales to 29% of total sales from a normal 10%. Housing seems to finally be in a sustainable recovery from a low level. Most measures of pricing are showing accelerating gains. The median price for sales of existing houses reached $177,400 in April, up 10.1% from April 2011. This large gain reflects an ongoing shift in the mix of sales to larger houses and fewer distressed sales. Home prices tracked by the Federal Housing Finance Agency gained 2.7% year-over-year in March, largely due to a 1.8% price increase in March from February. Core Logic produces a price index by tracking the resale price of the same home. Excluding foreclosures, it moved into positive territory in March, though with foreclosures included, the index is still negative. With home prices rising, inventories low, and new home sales low relative to the number of households, we expect starts to rise and residential investment to continue providing a substantial contribution to GDP growth.
2012 Economic Growth Fellow
David Malpass is president of Encima Global, and chairman of GrowPac. He writes a regular Current Events column in Forbes magazine, and his opinion pieces appear regularly in the Wall Street Journal. He sits on the boards of the Economic Club of New York and the National Committee on U.S.-China Relations. Formerly, Mr. Malpass was chief economist of Bear Stearns. Between February 1984 and January 1993, he held economic appointments during the Reagan and Bush Administrations. He was Deputy Assistant Treasury Secretary for Developing Nations, a Deputy Assistant Secretary of State, Republican Staff Director of Congress’s Joint Economic Committee, and Senior Analyst for Taxes and Trade at the Senate Budget Committee.Full Bio
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