“There’s still plenty of pent up activity in the housing sector. And it’s hard to see the US economy running out of steam with this much upside left in residential investment, according to some economists and analysts,” said Bloomberg Business Thursday.
“New [home] foreclosures have dropped to precrisis levels and sales of previously owned homes—the bulk of the market—have climbed to the pace of the early 2000s. Rising housing prices have made homeowners feel better about spending on their homes,” according to Wall Street Journal Monday.
US Real Estate Activity
While US housing and auto sales showed strength over the summer, manufacturers were feeling pressure from China’s economic slowdown and the oil industry was squeezed by lower energy prices. That’s the US economic picture that emerges from the Federal Reserve’s latest look at business conditions around the country, said Associated Press Economics September 5. The Fed said 11 of its 12 regional banks reported that the economy grew at least modestly in July through mid-August. One of the Fed’s regions — Cleveland — reported only slight growth.
The Fed report, known as the beige book, will be used for discussion when the central bank meets next on Sept. 16-17. The gathering will be closely watched because of the possibility it will decide to start raising interest rates from record lows near zero.
The recent stock market turbulence, triggered by worries about China’s slowdown, has led some analysts to lower the odds for a Fed move in September. But other economists still believe a Fed rate hike this month is likely, especially if markets stabilize and Friday’s unemployment report shows strong job gains continued in August.
Residential Investment, US
The Bloomberg chart on this page shows US residential investment’s share of nominal gross domestic product, with the start of the previous six rate hike cycles denoted with a circle. The severity of the housing bust prompted activity in this sector to stay at depressed levels, even with the Great Recession getting farther away in the rear view mirror.
Residential investment accounts for 3.34 percent of nominal gross domestic product, as of Q2 2015, well below its long-run average of 4.56 percent, as Macquarie analyst David Doyle has observed. The Fed has not initiated a series of rate hikes at a time when residential investment’s share of gross domestic product is more than one standard deviation below its long-run average since at least 1970.
US Single-Family Construction
During the past year, single-family construction added up to just 1 per cent of gross domestic product, roughly half the contribution during the 1990s, said WSJ. Even though new-home sales are running more than 20 per cent ahead of last year’s pace, that pace is still well below almost every year of the 1990s.
Contracted sales of newly built, single-family homes accounted for 16 per cent of the annual unit volume of all single-family home sales in the 1990s, on average. Last year, that ratio was 9.2 per cent. With homes for sale in short supply, price gains are outstripping income growth. Inflationary pressures are modest throughout the economy, save housing. The consumer-price index’s measure of core inflation, which excludes the volatile food and energy categories, is up 1.8 per cent over the past year. It would be half that if shelter costs were excluded.
Home Inventory and Demand, US
Both the absolute level of inventory of new and existing homes (now 2.3 million units total) and inventory as a percentage of households (now 1.6 per cent) are at or near 15-year lows, according to Barron’s Monday. Over the past year, 1.5 million new households have formed; that compares with less than 1.2 million new housing units. In addition, over 30 per cent of 18- to 34-year-olds are living at home. What does this mean? A lot of pent-up demand, and if it picks up, as we expect, housing starts will likely rise toward 1.5 million units (or higher) in the next two to three years. Simply put, with residential investment spending at 3.3 per cent of GDP, the US has been significantly under-building relative to long-term demand.