David Crowe

Chief Economist 


Washington, D.C.

Anje Jager/agencyrush.com David Crowe Chief Economist NAHB Washington, D.C. [email protected]

Housing is not playing its traditional role of pulling the economy out of the recession. In fact, housing continues to move sideways as the overhang of foreclosures and tight credit keeps supply high and demand low. As a result, economic growth has been anemic, unemployment has remained high, and households remain uncertain about the future. A correction depends upon more reasonable credit availability and a clear signal that existing federal policy supporting housing will remain in place.

The economic recession was officially over in mid-2009, and housing’s contribution to Gross Domestic Product bottomed at the same time. Neither has followed a typical recovery path since then.

In other post-WWII recessions, housing pulled the rest of the economy along by growing at an annual average real rate of 29.5 percent during the first year of recovery. In the first year of the most recent recovery, housing grew 5 percent. Rather than growing at four times the rate of the overall economy, housing has barely grown at all. In fact, in the seven quarters of the current recovery, housing is 3.2 percent below where it was at the end of the recession while the economy grew 5 percent.

But housing construction expenditures don’t tell the entire story. Building 1,000 single-family homes creates 3,000 jobs, half in construction and half in support industries such as appliances, carpets, building materials, banking, etc. Single-family construction has dipped below 500,000 but underlying demographic demand requires 1.5 million single-family homes a year. The one million homes in lost production means a loss of three million jobs.

In addition to the lost economic activity from building homes, families moving into new homes would normally spend more than non-moving families on furnishings, decorations, landscaping, and other improvements. At roughly $5,000 per new home, an additional $5 billion in economic activity has been lost each year because of the new building slowdown.

The return to a normal housing market involves a chicken and egg cycle. Households remain hesitant to go forward with a home purchase or renting a new apartment when job prospects remain uncertain, but building homes and furnishing them has been the traditional means of sparking hiring. This time around, the rest of the job market will have to pull harder, and housing will only join later in the process. Buying a home has been further complicated by the fear of a change in federal policies and further price declines.

The current housing market also suffers from an imbalance of supply and demand, and both are out of kilter. The supply of new homes has been dropping for more than five years. Single-family production is 3 million units under where it would have been had we remained on a steady, demographically driven path. Any excess building has been more than offset by the longest construction decline since the 1930s. However, foreclosures, short sales, and other distressed dispositions have produced 2 to 4 million units over a normal level of vacant homes and apartments.

On the demand side, roughly 2 million households did not form over the past four years. Young people remained with or returned to their parents, roommates did not venture out on their own, and couples did not divorce. The households that did form rented a home. Since 2004, the number of homeowners has remained about 75 million but the number of renters has increased by over 4 million or almost 2 million more than expected. Fewer households and homeowners have reduced demand for owned homes and switched the production balance from single-family for-sale homes to multifamily for-rent apartments.

A return to historic levels and shares awaits a return in total demand and a shift back to homeownership preferences. Potential home buyers will remain hesitant as long as Washington officials continue to attack current housing policies as a culprit instead of a contributor to economic growth and stability.