by Bill McBride on 10/15/2012 04:47:00 PM
Monday, October 15, 2012
Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.
For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.
When I posted that graph, the bottom wasn't obvious to everyone. Now it is, and here is another update to that graph (and a repeat of some analysis).
Click on graph for larger image.
The arrows point to some of the earlier peaks and troughs for these three measures.
The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom - something a number of us predicted given the overhang of existing vacant housing units.
Housing plays a key role for employment too. Here is an update to a graph I've been posting for a few years. This graph shows single family housing starts (through August) and the unemployment rate (inverted) also through September. Note: there are many other factors impacting unemployment, 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) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing last year. This was one of the reasons the unemployment rate remained elevated.
Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional 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, following the recent recession with the huge overhang of existing vacant housing units, this key sector didn't participate. This time the unemployment rate started falling before housing starts picked up. Going forward I expect housing activity to increase and help push down the unemployment rate. Unfortunately I expect the housing recovery to be somewhat sluggish.