Improving Housing Market Positive Factor in Economic Growth

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The latest data on the economy suggests that the improving housing market is positively contributing to economic growth, and it a pronounced fashion.

By Peter Ricci

The latest data from the Bureau of Economic Analysis, which looked at the U.S. economy in the third quarter, was good but unspectacular – a 2 percent annual rate of growth, up from 1.3 percent in the second quarter and consistent with the first quarter. The real news, though, was the share that the improving housing market made up of that growth, and how its role suggests, rather encouragingly, that housing is making steps towards a recovery.

Improving Housing Market A Positive for The Economy

As David Crowe, the NAHB’s chief economist, explained it, the housing market’s contribution to the third-quarter economic growth is impressive for a number of reasons:

  • Between homebuilding and remodeling, which account for the “residential fixed investment” of GDP, housing accounted for 0.33 percent of GDP growth, which is a whopping 17 percent of the total (up from 15 percent in the first quarter).
  • It’s important to point out, that’s for the entire U.S. GDP, which was $15.09 trillion at the end of 2011!
  • Even more impressive, residential fixed investment accounts for only 2.5 percent of that $15.09 trillion. So in other words, that tiny subset of the U.S. economy, just 2.5 percent, made up 17 percent of GDP growth in 2012’s third quarter.

The Housing Market in 2013 and Beyond

As promising as those numbers are, the obvious question is whether housing will be able to sustain them going in to 2013 and beyond. A number of factors, Crowe said, will determine that, including:

  • New single-family home sales, which we’ve been monitoring closely, have been rocking it as of late, with the three-month moving average of new home sales increasing steadily for more than a year. That increase in sales, though, has pushed down the inventory of new construction properties, and in September, inventory stood at just 4.5-months supply, a seven-year low.
  • Also, inventory advanced by only 2,000 for the month, and the number of immediately available, move-in ready properties stands at just 38,000, a record low.

So in other words, homebuilders need to build more! Once builders are more confident in the demand for new housing, Crowe wrote, and they begin building on a more consistent basis, the result will be what he dubbed the “virtuous circle” of homebuilding and economic growth, where the improving housing market and economic growth work hand in hand.

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