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Friday, April 20, 2012

Residential Investment and the Housing Industry Recovery

by Calculated Risk on 4/20/2012 01:11:00 PM

Earlier this week I wrote:

"There is no question that housing starts and residential investment have bottomed. And it appears new home sales have also bottomed.  For the housing industry, the recovery has started. The debate is about the strength of the recovery, not whether there is a recovery (I think housing will remain sluggish for some time, and I expect 2012 to be another weak year, but better than 2011)."
I've received several questions about this.  We could look at several measures: construction employment is up about 100 thousand payroll jobs from the bottom, housing starts are up 36% from the bottom (thanks to multi-family), and residential investment has been adding to GDP for three consecutive quarters (probably four consecutive quarters once Q1 2012 GDP is released next week).

What is residential investment? According to the Bureau of Economic Analysis residential investment (RI) is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.

Here is a graph of the contribution of RI to the percent change in GDP since 2004:

Residential Investment Click on graph for larger image in graph gallery.

Note that RI made a large negative contribution in every quarter in 2006, 2007 and 2008. In 2009 and 2010, RI was impacted by the housing tax credit, but otherwise RI was still mostly negative.

Starting in Q2 2011, RI started making a small positive contribution to the change in GDP. This was an important change (something I mentioned at the beginning of 2011.)

I expect RI to make further positive contributions to GDP growth in 2012, and not just from multi-family and home improvement. I also expect single family investment to increase from the very low rate in 2011.

Here is an article that mentions a little new single family construction, from Diana Olick at CNBC: Phoenix's Hard-Hit Housing Starts to Rise From Ashes
Mike Ripson hasn't built a home in three years, but he is about to. He has been sitting on one hundred sixty acres of land just outside Phoenix, Arizona, which he intends to divide into 121 one-acre lots.

"Now's the time because we've been studying the marketplace, and we noticed beginning late last summer, early fall, that for homes priced less than $100,000, the market was becoming very tight," says Ripson, whose company is celebrating its ten year anniversary this week.

"Over the last several months that price point has increased such that today, homes priced less than 300,000 dollars, there's less than a thirty-day supply in the marketplace," Ripson adds.

"To give you an example, within a five mile radius of where we sit here at Sonoran Acres, two months ago there were 18 homes on the market. Today there's only one," says Ripson.

That's why he re-opened his model home two weeks ago, and immediately saw high buyer traffic. He filed permits for two new homes, which he expects to sell in the next few weeks, thanks to his low, $200,000 price point.
This is just a few homes and doesn't suggest a surge in new home sales. But I expect some increase this year from 2011, and yes, the housing recovery has started (note: this isn't a comment about home builders, just about the turn in residential investment - a positive for the economy).