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Tuesday, August 16, 2011

Housing Starts and the Unemployment Rate

by Calculated Risk on 8/16/2011 02:26:00 PM

An update by request: The following graph shows single family housing starts (through July) and the unemployment rate (inverted) through July. 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 have moved sideways for the last two and a half years. This is one of the reasons the unemployment rate has stayed elevated.

Housing Starts and Unemployment RateClick on graph for larger image in graph gallery.

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 this time, with the huge overhang of existing housing units, this key sector hasn't been participating. This is what I expected when I first posted the above graph two years ago!

The good news is residential investment should increase modestly in 2011, mostly from multi-family and home improvement, but construction job growth will remain sluggish until the excess housing supply is absorbed.