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Sunday, February 03, 2008

Components of Residental Investment

by Calculated Risk on 2/03/2008 04:06:00 PM

This is a follow up to the previous post regarding investment in home improvement.

This data is from the Bureau of Economic Analysis (BEA), supplemental tables. (see Section 5: Table 5.4.5AU. Private Fixed Investment in Structures by Type, near the bottom)

This graph shows the major components of residential investment (RI) normalized by GDP.

Components of Residential InvestmentClick on graph for larger image.

The largest component of RI is investment in new single family structures. This includes both homes built for sale, and homes built by owner.

The second largest component of RI is home improvement. As I noted in the previous post (using inflation adjusted dollars), investment in home improvement has held up pretty well. This investment could be seriously impacted by declining mortgage equity withdrawal (MEW) over the next few quarters.

The third largest category (at least in recent years), has been broker's commissions. This is the only component of existing home sales included in residential investment, and the decline in broker's commissions follows the decline in existing home sales.

The only other major component of RI is multifamily structures. This includes apartments and some condo projects.

Most of the focus has been on declining investment in single family structures (declining new home sales) and broker's commissions (declining existing home sales). But so far, with strong MEW, home improvement has held up well.

Rob sent me this description of what he is seeing in the housing market in Western Washington state:

I want to echo the observations of the Bay Area home shopper.
In nearly every middle class house listing I view, I see upgraded kitchens with granite (usually slab) counter tops . I also see matching stainless steel appliances and high end cabinets.

Now, these houses and condos are all less than 15 years old, so the owners were not generally replacing worn out or really out-of-style stuff. And these houses did not come equipped like this. I also see living rooms and family rooms that have complete, matching sets of furniture, probably from places like Pottery Barn. Not just one or two pieces, but _every_ single_ piece_. It's like all living, dining and family room furniture was swapped out at exactly the same time. I contrast this with how houses used to be furnished: a piece here, a piece there, a gift from relatives, etc., gradually over the years. No more. Everyone is going for the "showroom" look. ...

I even see this phenomenon in the low-end condo development where I bought my "starter home" back in 1993. ... when I sold my unit in 2006 after renting it out for a few years, it was "stock." No new cabinets, appliances, granite counter tops, wood or laminate flooring, simple fixtures, etc. And it was in great shape. Well, I have found that many of the units in that development have also been "pimped out" with "designer paint schemes," granite counters, new kitchen cabinets, $300 faucets and appliances, pergo flooring, fancy new mill work, etc.

These condos were built in 1993 and 1994. The counters, cabinets, mill work and most appliances should have been in reasonably good condition and not too dated in appearance. Since those folks have very modest incomes, I know where the money [probably] came from.
I'm sure these "pimped out" homes are all across the country. And MEW has probably been the primary source of funds for many of these homeowners. Now that it appears MEW lending is being tightened - especially for Home Equity Lines of Credit - this will probably impact home improvement spending.