Tuesday, October 20, 2009

Housing and the Economy

by Calculated Risk on 10/20/2009 10:10:00 AM

Just a quick comment ...

Probably the best leading indicator for the economy is investment in housing1.

We can use new home sales, housing starts (usually single-family starts), or residential investment (from the BEA GDP report), as indicators of housing.

We can probably also use the NAHB builder confidence index.

Those expecting a "V-shaped" or immaculate recovery - with unemployment falling sharply in 2010 - are clearly expecting single family housing starts to rebound quickly to a rate significantly above 1 million units per year.

Not. Gonna. Happen.

There are just too many excess housing units for a rapid recovery in new home sales and single family housing starts. Yes, new home inventory has declined significantly, and existing home inventory has also decreased (although still very high). But there are also a record number of vacant rental units - with the vacancy rate approaching 11% - and the housing inventory includes these units too.

Notice what is not included as a leading indicator: existing home sales.

The sale of an existing home adds a little to the economy (some commissions and fees), and sometimes some added spending on improvements. Only the improvements add to the housing stock (not commissions). And right now marginal buyers have very little to spend on improvements (see this story).

Those looking at existing home sales for economic guidance are confusing activity with accomplishment.

1I've written about this extensively, but I'll put up another post on housing investment leading the economy soon.