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Residential RE investment to more than double GDP growth in 2012

Investment in residential property will grow more than double the rate of gross domestic product in 2012, according to analysts at Bank of America Merrill Lynch (BAC).

An modest gain in residential construction this year should provide a small jolt to the economy.

Analysts forecast housing starts to average 710,000 per quarter, a 15% gain from 2011 when starts averaged about 620,000. The gain should translate to a 5% increase in residential investment — double that of GDP growth forecasts.

"At first blush, this seems startling," BofAML analysts said. "But, since the level of construction has fallen to such low levels, a large percentage point gain still implies a fairly small amount in units or dollars."

The Federal Reserve estimates GDP will grow between 2.2% and 2.7% this year, while Capital Economics estimates GDP will grow only 1.5% in 2012, with residential investment contributing 0.1% to that total.

Because residential investment only makes up a 2.2% share of the economy, it will only add 0.1% of growth to 2012 GDP, based on BofAML's forecast. A 0.6% contribution requires a 20% rise in residential investment, which would only occur by housing starts shooting up to 1.2 million by the end of the year.

An increase in construction, even if it is small, will create jobs.

Since the start of the housing collapse, the construction sector shed nearly 2.3 million jobs, accounting for about a quarter of the total job loss during the recession. The labor market started to recover in mid-2009, but the housing sector continued to shed jobs until the end of 2010.

The analysts forecast 85,000 construction jobs will be added this year and nearly 200,000 in 2013. But January's employment figures show that 21,000 construction jobs have already been created, of which 2,500 were residential construction jobs and 6,400 were nonresidential.

Before the employment data came out last week, BofAML analysts said because less labor-intensive multifamily building and renovations will drive most of the gain in residential construction, it won’t create as many jobs initially.

"Construction job cuts were not as severe as the drop in expenditures, which suggests that companies also reduced hours in addition to headcount," analysts said. "When activity picks up again, the number of hours worked will recover, delaying hiring," they said.

Realtors, furniture stores and building material stores should feel a spillover from the rise in construction employment, creating another 25,000 jobs in 2012 and 60,000 in 2013.

"All in, our model suggests housing-related jobs will account for 8% of jobs this year and about 20% next year," the analysts concluded.

"This will help reduce the stubbornly high bucket of long-term unemployment and underpin confidence. A virtuous cycle can start to develop, but it will be gradual."

jhilley@housingwire.com

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