Wednesday, December 30, 2015

Question #8 for 2016: How much will Residential Investment increase?

by Bill McBride on 12/30/2015 12:38:00 PM

Over the weekend, I posted some questions for next year: Ten Economic Questions for 2016. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

8) Residential Investment: Residential investment (RI) was up solidly in 2015. Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI increase in 2016? How about housing starts and new home sales in 2016?

First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2015.

Residential Investment as Percent of GDPClick on graph for larger image.

Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness was a key reason why the recovery was sluggish. Residential investment finally turned positive during 2011 and made a solid positive contribution to GDP every year since then.

But even with the recent increases, RI as a percent of GDP is still very low - close to the lows of previous recessions - and it seems likely that residential investment as a percent of GDP will increase further in 2016.

Total Housing Starts and Single Family Housing StartsThe second graph shows total and single family housing starts through November 2015.

Housing starts are on pace to increase over 10% in 2015. And even after the significant increase over the last four years, the approximately 1.1 million housing starts in 2015 will still be the 11th lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the seven lowest years were 2008 through 2014).  The other lower years were the bottoms of previous recessions.

New Home SalesThe third graph shows New Home Sales since 1963 through November 2015. The dashed line is the current sales rate.

New home sales in 2015 were up close to 14% compared to 2014 at close to 500 thousand.

Here is a table showing housing starts and new home sales over the last decade. No one should expect an increase to 2005 levels, however demographics and household formation suggest starts will return to close to the 1.5 million per year average from 1959 through 2000. That means starts will come close to increasing 40% over the next few years from the 2015 level.

Housing Starts and New Home Sales (000s)
  Housing
Starts
ChangeNew Home
Sales
Change
20052068--- 1,283---
20061801-12.9%1,051-18.1%
20071355-24.8%776-26.2%
2008906-33.2%485-37.5%
2009554-38.8%375-22.7%
20105875.9%323-13.9%
20116093.7%306-5.3%
201278128.2%36820.3%
201392518.5%42916.6%
201410038.5%4371.9%
20151111010.6%49814.0%
12015 estimated

Most analysts are looking for starts to increase to around 1.25 million in 2016, and for new home sales around 560 thousand. This would be an increase of around 12% for both starts and new home sales.

I think there will be further growth in 2016, but I'm a little more pessimistic than some analysts. Some key areas - like Houston - will be hit hard by the decline oil prices. And I think growth will slow for multi-family starts. Also, to achieve double digit growth for new home sales in 2016, the builders would have to offer more lower priced homes (the builders have focused on higher priced homes in recent years).  There has been a shift to offering more affordable new homes, but it takes time.

My guess is growth of around 4% to 8% in 2016 for new home sales, and about the same percentage growth for housing starts.  Also I think the mix between multi-family and single family starts will shift a little more towards single family in 2016.

Here are the Ten Economic Questions for 2016 and a few predictions:

Question #1 for 2016: How much will the economy grow in 2016?
Question #2 for 2016: How many payroll jobs will be added in 2016?
Question #3 for 2016: What will the unemployment rate be in December 2016?
Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
Question #6 for 2016: Will real wages increase in 2016?
Question #7 for 2016: What about oil prices in 2016?
Question #8 for 2016: How much will Residential Investment increase?
Question #9 for 2016: What will happen with house prices in 2016?
Question #10 for 2016: How much will housing inventory increase in 2016?