18 Jul 2012 by Jim Fickett.
Housing starts are in an uptrend, which is good news for US economic growth, however the level of starts is still near the lows of previous recessions. The contribution of home construction to economic growth is positive, but small.
Note that the recent rise in single-family starts, much in the news, is still not a clear trend; it could just be noise. The overall rising trend, which is indeed clear, is due to multi-family starts. In other words, during the boom many people who can only afford apartments bought houses, and this distortion is still being corrected.
It is, of course, home construction, rather than sales or prices, which is most important to economic growth. And in most recoveries housing construction contributes strongly. So it is good news that housing starts seem to be recovering. However this recovery remains slow, and from a very low level. Note that the number of starts is still near the lows of previous recessions. All this means that the contribution to GDP growth remains quite small:
While acknowledging the stabilisation in the housing sector, some analysts, such as Jim O’Sullivan, chief US economist at High Frequency Economics, were lukewarm about the sector’s impact on broader US economic growth.
“Total residential investment, including improvements and sales commissions, directly accounts for 2.3 per cent of gross domestic product now, down from a 6.3 per cent peak in 2005,” he said.
“Within that, new home construction, the part tracked by housing starts, accounts for 0.9 per cent of GDP now, versus a peak of 3.9 per cent in 2005. A 24 per cent rate of growth in starts thus directly boosts GDP growth by only a few tenths of a point.”
Overall, these data support the thesis that we are still in a slow, fragile recovery.