by Calculated Risk on 12/26/2019 04:05:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2020. I'm adding some thoughts, and maybe some predictions for each question.

8) Residential Investment: Residential investment (RI) picked up in the second half of 2019, and new home sales were up about 10% in 2019 compared to 2018.  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 2020?  How about housing starts and new home sales in 2020?

First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2019:

Click 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.  However RI as a percent of GDP declined in late 2018 and early 2019.

We don't have the data yet for Q4 2019 yet, but it appears RI will make only a small contribution to GDP (probably slightly negative) in 2019.

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

The second graph shows total and single family housing starts through November 2019.

Housing starts are up 0.6% through November 2019 compared to the same period in 2018, and are on pace to increase just over 1% in 2019.

Even after the significant increase over the last several years, the approximately 1.27 million housing starts in 2019 will still be the 20th lowest on an annual basis since the Census Bureau started tracking starts in 1959  (61 total years).  The seven lowest years were 2008 through 2014, and the other lower years were the bottoms of previous recessions.

The third graph shows New Home Sales since 1963 through November 2019. The dashed line is the November sales rate.

New home sales in 2019, through November, were up 9.8% compared to the same period in 2018.   Sales will probably finish up more than 10% year-over-year.

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 this cycle.

Housing Starts and New Home Sales (000s)
	Housing Starts	Change	New Home Sales	Change
2005	2,068	---	1,283	---
2006	1,801	-12.9%	1,051	-18.1%
2007	1,355	-24.8%	776	-26.2%
2008	906	-33.2%	485	-37.5%
2009	554	-38.8%	375	-22.7%
2010	587	5.9%	323	-13.9%
2011	609	3.7%	306	-5.3%
2012	781	28.2%	368	20.3%
2013	925	18.5%	429	16.6%
2014	1,003	8.5%	437	1.9%
2015	1,112	10.9%	501	14.7%
2016	1,174	5.6%	561	12.0%
2017	1,203	2.5%	613	9.3%
2018	1,250	3.9%	617	0.7%
20191	1,266	1.3%	679	10.0%
12019 estimated

Most analysts are looking for starts and new home sales to increase further in 2020. For example,  Fannie Mae is forecasting an increase in starts to 1.351 million, and for new home sales to increase to 725 thousand in 2020.

Note that New Home sales have averaged 717 thousand over the last four months on seasonally adjust annual rate (SAAR) basis.   So an increase to 725 thousand for 2020 isn't a large increase over the recent sales rate.  And housing starts have average 1.332 million over the same period.

My sense is the pickup that happened in the second half of 2019 will continue, and my guess is starts will be up year-over-year in 2020 by mid-to-high single digits.  My guess is new home sales will be over 700 thousand in 2020 (for the first time since 2007) and will also be up mid-to-high single digits.

Here are the Ten Economic Questions for 2020 and a few predictions:

• Question #1 for 2020: How much will the economy grow in 2020?
• Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?
• Question #3 for 2020: What will the unemployment rate be in December 2020?
• Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?
• Question #5 for 2020: How much will wages increase in 2020?
• Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?
• Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?
• Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?
• Question #9 for 2020: What will happen with house prices in 2020?
• Question #10 for 2020: Will housing inventory increase or decrease in 2020?