by Bill McBride on 10/19/2010 05:50:00 PM
Tuesday, October 19, 2010
An update by request ...
Click on graph for larger image in new window.
This graph shows single family housing starts and the unemployment rate (inverted) through September. Note: Of course there are many other factors too, but housing is a key sector.
You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.
Housing starts (blue) rebounded a little last year,and then moved sideways for some time, before declining again in May.
This is what I expected when I first posted the above graph over a year ago. I wrote:
[T]here is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think ... a rapid decline in unemployment is also unlikely.Usually near the end of a recession, residential investment1 (RI) picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.
However this time, with the huge overhang of existing housing units, this key sector isn't participating. Earlier today, NY Fed President William Dudley said the NY Fed's estimate was that "there are roughly 3 million vacant housing units more than usual". If that estimate is correct (I think it is too high), then it would take several years of housing starts at the current level, combined with more normal household growth, to eliminate the excess supply.
1 RI is mostly new home sales and home improvement.