Housing Recovery Gaining Traction
By Alan Levenson, T. Rowe Price Chief Economist – March 31, 2013
Four years after hitting bottom, housing is finally showing signs of a broadening recovery.
In the three years ended December 2008, housing starts fell by 72% and employment in housing-related industries contracted by 1.4 million. Sales of new and previously owned homes also fell sharply (-70% and -41%, respectively), and house prices plummeted 24%. In the gross domestic product (GDP) accounts, residential construction imposed a one-percentage-point drag on annual growth from 2006 through 2008.
Housing activity stabilized in 2009, but the recovery unfolded very slowly, reflecting lingering structural adjustments. As the broad job market began to improve in 2010, household formations began to rise: people who had doubled-up or moved in with relatives during the recession began to strike out on their own, raising the demand for places to live. Builders responded, but mostly in the multifamily sector, reflecting the ongoing aversion to homeownership.
Indeed, the entire 20% rise in housing starts for the two years ended 2011 came in the rental-oriented multifamily sector. Moreover, even as building activity stabilized, the drive to restore profitability continued: Housing-related industries shed an additional 800,000 jobs in 2009–2010.
The recovery began to broaden in 2011 and gained strength last year. Housing starts jumped 25% in 2011 and another 32% last year, actually contributing modestly to real GDP growth. At the same time, housing-related industries began a new hiring cycle, adding 55,000 positions in 2011 and 101,000 last year.
Finally, home sales began rising in mid-2011, spurring a recovery in single-family construction and supporting a rise in house prices that helped significantly reduce the number of mortgages in negative equity.
These trends should continue to gather momentum this year, underpinning prospects for sustained growth in the broader economy despite the drag from recent tax hikes and the sequestration of federal spending.
Housing starts are still roughly 25% below the pace required to keep up with population growth over time. We expect this gap to close over the next two years, with residential construction making a one-half-percentage-point contribution to real GDP growth this year. The expansion of housing-related production should spur the creation of about 300,000 jobs in housing-related industries this year.
The income paid to these workers in construction, real estate services, mortgage banking, and housing-related manufacturing—spent on the broad array of goods and services—will be an important secondary channel by which the housing sector contributes to broader economic recovery.
The nascent recovery in home prices—including a 7% rise last year—is another welcome contributor to sustainable growth, though its influence is likely to be modest in the near term. That’s because the inflation-adjusted house price—a widely accepted valuation metric—is still 6% below its long-term, pre-bubble trend. As a result, relatively few homeowners have experienced the rise in home value that they may have expected when the house was purchased.
In all, however, the emergence of the full suite of cyclical dynamics in the housing recovery—new construction, demand, employment, and price appreciation—is a milestone in the private sector’s deleveraging and rebalancing.
With this healing in an advanced stage, recovery in the U.S. economy should continue to gain momentum this year and into 2014, even as the recent double dose of fiscal tightening—tax increases and subsequent spending sequestration—works its way through the system.