The Housing Barometer

Housing construction is a key barometer of the overall economy. Looking to the year ahead, it is important to consider whether housing starts will ramp up, and, if so, to what degree, and what the impact will likely be on the overall economy. In short, while it appears that housing starts will ramp up modestly, that increase is unlikely to have a major impact on the overall economy.

Before looking forward, it is useful to review what the experts predicted at the start of last year and see how those predictions fared. In 2009, there were 554,000 housing starts – the fewest in 50 years – of which 445,000 were homes/single family dwellings and 109,000 were apartments and condominiums in multi-unit structures. At the beginning of 2010, the National Association of Realtors (NAR) predicted that housing starts would jump 38% to 752,000, an increase of 198,000 units. The National Association of Home Builders (NAHB) predicted a 25% increase to 697,000 starts. Similarly, the consensus of the 52 Blue Chip Economists was for a jump to 690,000 starts.

These expert predictions turned out to be overly optimistic. In January 2011, the Commerce Department reported that total housing starts for 2010 had increased by only 33,000 units, or 6%.

At the start of this year the NAR, the NAHB, Fannie Mae and Freddie Mac are each calling for an increase of housing starts to approximately 700,000 units. The predictions range from 704,000 starts to 716,000 starts, an increase of 20% to 21% over 2010. If 700,000 units are started, it would be 113,000 more starts than in 2010.

It is important to keep in mind that such predictions can change abruptly. Just last June, after housing had ramped up in early 2010 due to the homebuyer tax credit, the NAHB was predicting 991,000 starts for 2011.

It is also important to put the 2011 predictions into perspective. As noted, starts increased from 553,000 in 2009 to 587,000 in 2010. But prior to the recent recession, the lowest number of housing starts in the preceding 50 years was 1,013,000, in 1991. In the decade prior to the recession, the average number of housing starts per year was 1,515,000. If starts increase to the 700,000 range in 2011, they would still be less than 50% of that average.

There is good news in all of this seemingly bad news. The inventory of new homes for sale is at its lowest level since data was first collected in 1968. At the same time, population growth and household formation are increasing the demand for housing.

The predicted increase in housing starts of 110,000 to 125,000 units, to the 700,000 range, would likely have a limited impact on the overall economy. For the past five years, residential construction has fallen and has reduced overall Gross Domestic Product (GDP) for those years. Housing starts dropped by 268,000 units in 2006, by 445,000 units in 2007, by 450,000 units in 2008, and 352,000 units in 2009, and then rose by only 33,000 units in 2010. In other words, there were 2,068,000 housing starts in 2005, when residential investment as a share of the national economy peaked at 6.5%, and only 587,000 starts in 2010, when its share of the national economy fell to 2.2%, the lowest since records began in 1946.

Given the greatly diminished level of housing construction, the projected 20-21% increase is likely to directly increase the 2011 GDP by only 0.2% to 0.6%, according to most expert analyses. This estimate is consistent with projections of a modest overall increase in GDP in the 3% to 3.5% range.