Friday, January 25, 2013

Putting the US Housing Recovery into Perspective

Approximately two years ago, we began suggesting that the US housing market was in the process of bottoming and 2012 seemed to be a year in which new home construction and home sales gathered upward momentum. However, recently there seems to be near euphoria regarding the “strength” of the housing market and its ability to contribute to economic growth. We agree that housing is in the process of recovering, that it contributed to economic growth last year and is likely to do so again this year. However, the US housing market remains anything but strong. Here is some perspective:
·         In December, construction began on 954,000 homes on an annualized basis, the best month for housing starts since July 2008; twice the number started at the nadir in April 2009. However, that would have represented one of the worst months ever prior to the crisis. US housing starts data dates to 1959. In only 22 of 588 months from 1959 through 2007 were annualized monthly starts less than 1,000,000. In other words, December’s much ballyhooed starts figure would have fallen into the bottom 5% of monthly starts from 1959-2007.
·         In 2012, the US began construction on 780,000 dwellings, more than in any year since 2008. That represented an enormous increase of 28.12% over 2011. However, that is well below the lowest number of starts for any pre-crisis year. Prior to 2008, the lowest number of starts in any one calendar year was 1,013,900, in 1991. In other words, the US began construction on 23% fewer homes in 2012 than in any year from 1959-2007. The median number of starts from 1959 through 2007 was 1,507,600 starts, or nearly twice as many as last year.
The housing market has been getting better. Starts, sales, and prices are on the mend and housing is once again contributing to GDP growth. Those are certainly positives, as is the fact that after five years of moribund starts, the nation is likely in need of replacement stock (certainly portions of the mid-Atlantic and Northeast are after the hurricane). Yet the absolute level of activity in housing remains very low, far lower than at any other point in the 50 years prior to the crisis. While we expect housing to contribute to GDP, that contribution will be modest as housing represents a far smaller portion of the economy than it was six years ago. In short, the housing market is improving, but it is anything but strong.