In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Saturday, August 08, 2009

Housing Starts and the Unemployment Rate

by Calculated Risk on 8/08/2009 11:22:00 PM

Reader Mark sent me a link to a talk by Jon Fisher, a professor at the University of San Francisco School of Business. Jon made the point that housing starts and unemployment are inversely correlated.

Of course readers here know that housing lead the economy, and employment lags. So naturally housing and unemployment are inversely correlated with a lag.

Note: Dr. Leamer's Sept 2007 paper: Housing is the Business Cycle is an excellent overview of how housing leads the economy. (Something I covered extensively in 2005)

Housing Starts and Unemployment Rate Click on graph for larger image in new window.

This graph shows housing starts (both total and single unit) and unemployment (inverted).

You can see both the correlaton 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.

This suggests unemployment might peak in Spring 2010.

Professor Fisher argued that unemployment will rise to about 10.4% and then fall rapidly. He is basing the rapid decline on a "V shaped" housing recovery similar to previous recessions. I disagree with that point.

In most earlier recessions, the slumps were caused by the Fed raising interest rates to fight inflation. When the Fed cut rates, housing bounced back sharply (V shaped).

Although this recession was led by a housing bust - and that makes it look similar to some previous periods - this recession was not engineered by the Fed raising rates, rather it was the busting of the credit and housing bubbles, and all the related problems that led the economy into recession. Since there is still far too much existing home inventory, a sharp bounce back in housing starts is unlikely, so I think Fisher's forecast for a rapid decline in unemployment is also unlikely.