Don’t expect housing improvements to play a major part in any overall national economic recovery.
Because housing now makes up only a small share of the economy, the sector is unlikely to add much more than 0.2% to annual gross domestic product growth in 2012 and 2013, according to analysts at Capital Economics. So although housing may soon support growth, it won’t help much.
Normally in the first two years after a recession, residential investment adds an average of 0.7% to annual GDP growth. This time, it has added nothing, they say. If residential investment had performed as well as during past recoveries, then GDP growth in 2011 would have been close to 2.5% instead of 1.7%.
“The added problem is that housing now has to work harder to boost GDP growth,” analysts at the Toronto-based research firm said. “In the fourth quarter of last year, residential investment accounted for just 2.5% of overall GDP. That’s down from the 2005 peak of 6.3% and the 1946 to 2008 average of 4.8%. Back in 2005, every 10% increase in residential investment would have boosted GDP by 0.6%. The same increase would now boost GDP by just 0.2%”
The Federal Reserve Board of Governors, however, points out the importance of housing on the economy in its recent white paper suggesting potential fixes.
“Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” the Federal Reserve Board said.
The Capital Economics analysts expect housing will add about 0.5% to GDP in both 2014 and 2015.
“It is quite clear, then, that the housing recovery we expect will not be strong enough to trigger a significantly stronger recovery in the wider economy,” they said.
However, there is room for residential investment to rise as a share of GDP from, for example, homebuilding activity, which appears to have embarked on a modest upward trend.
Housing can also boost the economy through indirect effects on consumption, such as the so-called wealth effect, refinancing and extra spending on furniture and furnishings triggered by a home move.
Contrary to popular opinion, the U.S. economy can perform well without a strong housing market, according to Capital Economics analysts. For example, subdued residential investment growth did not prevent the economy from growing at healthy rates during the late 1980s and late 1990s, they said.
Programs such as the expanded Home Affordable Refinance Program will boost consumption, analysts say, but the ultimate impact will be “very small.” Data provided by Freddie Mac and the Mortgage Bankers Association suggest mortgage rates falling to 4.1% from 5.1% led about 4.5 million borrowers to refinance to a lower rate. That saved those Americans around $4.5 billion per year in monthly payments — less than 0.1% of GDP.
“This year, mortgage rates are likely to fall by less from 4.1% to around 3.7% and many borrowers who can refinance may have already done so,” analysts say. “We estimate that refinancing may save households around $1.4 billion in mortgage payments this year, which wouldn’t noticeably boost GDP.”
Write to Justin T. Hilley.
Follow him on Twitter @JustinHilley.
