David Crowe

Chief Economist 


Washington, D.C.

Anje Jager/agencyrush.com David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com

The tried-and-true saying that housing leads the economy out of a recession is based on real fact and on the large part housing plays in the overall economy. During a recession, households hold back on large expenditures because the future becomes uncertain. Jobs are or could be lost, futures become hazy, and young people remain at home or in roommate situations. A pent-up demand for housing builds. At the same time, builders, construction workers, and the industries that supply home builders compete for the remaining work and the price of homes either stalls or declines. The softness in the overall economy means less demand for borrowed funds, so interest rates fall as well. The Federal Reserve usually assists the rate decline as a means for stimulating the economy.

As these conditions persist, households with the greatest need for a new home, such as an expanding family or a job move, take advantage of the bargain prices and interest rates. The early movers influence another wave and the momentum builds on itself. As prices start back up and interest rates begin to rise as the overall economy gets legs, more buyers are influenced to get back into the market.

The construction of homes also provides a feedback employment effect as each new home generates the equivalent of more than three person-years of employment. Half of the new jobs are in construction and half are in allied sectors such as the manufacturing of building-related materials as well as professional trades such as mortgage originators, closing attorneys, and sales agents.

This housing recovery has been much slower than previous ones and so has the overall economic recovery. In the first year of past recoveries, single-family housing construction has increased about four times faster than the overall economy and hence has accounted for about one-third of the economy’s first year of recovery growth. In past cycles, the snapback amount is larger when the decline is greatest. After the mid-1970s recession, single-family housing construction grew more than 50 percent in the first year. Even following the worst recession since the Great Depression, housing not only did not advance, but it actually pulled overall growth backward about 5 percent.

However, the tide has turned. In the most recent four quarters, single-family housing has grown five times faster than the economy. The increase in the annual pace of single-family construction in the past year has added almost a half-million jobs to the U.S. economy, or about a quarter of all job growth. The job growth adds confidence and income to more households and amplifies the boost that housing typically provides in a recovery.

The three-year delay in housing’s spark to the rest of the economy likely is the result of the severe fall in house prices, consumers’ wealth, and buyer confidence. The normal sequence of a recovery was aborted by a historic fall in housing demand that depressed national house prices by as much as 30 percent. Household balance sheets have recovered, national home prices are advancing, and the job boost from housing has helped a slow-moving employment scene.

As pent-up demand returns, the steady demand from a growing population also will begin to increase housing demand. The elementary cause for building more homes is more households. The next decade will see the echo boom generation—the children of the baby boomers—mature into household-formation ages. Many of these young households will become renters first because of credit, down payment, or income barriers. But their independent living still will require building more apartments, and polls on life-long goals show a strong desire for single-family home ownership.

Pent-up demand coupled with a growing population and the positive feedback effects from building homes will keep housing growing significantly faster than the economy for the next two years as a real economic recovery finally begins.