Monday, December 31, 2018

Question #8 for 2019: How much will Residential Investment increase?

by Calculated Risk on 12/31/2018 01:13:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2019. I'm adding some thoughts, and maybe some predictions for each question.

8) Residential Investment: Residential investment (RI) was sluggish in 2018, and new home sales were mostly unchanged from 2017.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.  How much will RI increase in 2019?  How about housing starts and new home sales in 2019?

First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2018:

Residential InvestmentClick on graph for larger image.

Usually residential investment is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and that weakness was a key reason why the start of the recovery was sluggish.

Residential investment finally turned positive during 2011 and made a solid positive contribution to GDP every year through 2017.

We don't have the data for Q4 2018 yet, but it appears RI will make a small negative contribution to GDP in 2018.

RI as a percent of GDP is still low - close to the lows of previous recessions.

Total Housing Starts and Single Family Housing StartsThe second graph shows total and single family housing starts through November 2018.

Housing starts are on pace to increase close to 5% in 2018, although growth slowed toward the end of 2018.

Even after the significant increase over the last several years, the approximately 1.26 million housing starts in 2018 will still be the 18th lowest on an annual basis since the Census Bureau started tracking starts in 1959 (the seven lowest years were 2008 through 2014).  The other lower years were the bottoms of previous recessions.

New Home SalesThe third graph shows New Home Sales since 1963 through October 2018. The dashed line is the October sales rate.

Note: Due to the government shutdown, New Home sales for November are not available.

New home sales in 2018, through October, were up about 3% compared to the same period in 2017.   However, sales were soft in Q4, and I estimate sales were about the same in 2018 as in 2017.

Here is a table showing housing starts and new home sales since 2005. No one should expect an increase to 2005 levels, however demographics and household formation suggest starts will increase further over the next few years.

Housing Starts and New Home Sales (000s)
  Housing
Starts
ChangeNew Home
Sales
Change
20052,068--- 1,283---
20061,801-12.9%1,051-18.1%
20071,355-24.8%776-26.2%
2008906-33.2%485-37.5%
2009554-38.8%375-22.7%
20105875.9%323-13.9%
20116093.7%306-5.3%
201278128.2%36820.3%
201392518.5%42916.6%
20141,0038.5%4371.9%
20151,11210.9%50114.7%
20161,1745.6%56112.0%
20171,2032.5%6139.3%
201811,2635.0%6130.0%
12018 estimated

Most analysts are looking for starts and new home sales to increase to slightly in 2019. For example, the NAHB is forecasting a slight increase in starts (to 1.269 million), and no change in home sales in 2019. And Fannie Mae is forecasting a slight increase in starts (to 1.265 million), and for new home sales to increase to 619 thousand in 2019.

My sense is the weakness in late 2018 will continue into 2019, and starts will be down year-over-year, but not a huge decline.  My guess is starts will decrease slightly in 2019 and new home sales will be close to 600 thousand.

Here are the Ten Economic Questions for 2019 and a few predictions:

Question #1 for 2019: Will Mr. Trump negatively impact the economy in 2019?
Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
Question #4 for 2019: What will the unemployment rate be in December 2019?
Question #5 for 2019: Will the core inflation rate rise in 2019? Will too much inflation be a concern in 2019?
Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?
Question #7 for 2019: How much will wages increase in 2019?
Question #8 for 2019: How much will Residential Investment increase?
Question #9 for 2019: What will happen with house prices in 2019?
Question #10 for 2019: Will housing inventory increase or decrease in 2019?