Historically, America’s residential housing start and building permit data were reliable indicators of future economic activity at the national level. The pace of housing production had a major impact on the overall economy because the value of new construction and the incomes generated by that industry were large relative to the overall economy.
That cause and effect relationship no longer exists in a meaningful way. As a result, recently released statistics on housing starts and building permits for June, as positive as they were, should not be interpreted as adding significant strength to this nation’s lethargic recovery.
I think the recent strong housing data, while encouraging in terms of reflecting a bit of a rebound in housing production, will do little to help the overall U.S. recovery because the housing numbers are so small in relation to the size of the overall economy.
Why many analysts point to housing production as having a major impact on the American economy goes back many years, when it was true, but no longer is. Let me explain.
Early in my career, 1971 and 1972, I had the opportunity to serve as senior staff economist on President Nixon’s Council of Economic Advisors, where my primary areas of analytical responsibility were the nation’s housing and mortgage markets.
As it happened, 1972 was and remains the record year for new housing starts and residential building permits. Starts and permits in 1972 far exceeded the June 2015 numbers, even though the American economy is dramatically larger today than it was in 1972. Back in 1972, housing starts and permits were big fish in a small pond, whereas the housing starts and building permits activity in June 2015 are the equivalent of small fish in a big pond. On a nationwide basis they don’t have the ability to make much of a difference, no matter what they do.
A quick snapshot of some key numbers should help to clarify the big fish/little fish analogy:
America’s total population
1972: 210 million
2015: 322 million
America’s Gross Domestic Product (GDP)
1972: $1.28 trillion
2015: $17.4 trillion (est.)
Average rate on 30-year fixed-rate home mortgages, including points
1972: About 7½ percent
2015: About 4½ percent
Residential housing starts, include single- and multifamily units, (estimate is from June annualized rate)
1972: 2.37 million
2015: 1.17 million (est.)
Residential building permits, include single and multifamily units, (estimate is from June annualized rate)
1972: 2.22 million
2015: 1.34 million (est.)
These numbers are oversimplifications, but tell a credible story, nonetheless. In 1972, with 112 million fewer people and an overall economy only about 1/14th as large as it is today, the homebuilding industry took out almost twice as many permits and started construction on twice as many new homes as it will in 2015. And these records were set at mortgage interest rates a full three percentage points higher in 1972 than they are today!
Four general conclusions come to mind.
• First, at the national level we are woefully under-producing new units to house America’s growing population.
• Second, in order to allocate the relatively scarce number of new and existing housing units in this country, homeowners and homebuilders have responded by raising prices on existing and new homes sold.
• Third, landlords have responded in a similar fashion: by raising rents on apartments.
• Fourth, it should come as no surprise that housing affordability on a nationwide basis is a perpetually troublesome issue for single-family housing and apartment markets alike.
All this is not to say we shouldn’t be pleased that the recent trend in housing starts and building permits is upward. It is a good thing, indeed.
My point simply is that it is far too little, given the large population base of this country, and relative to the overall rate of domestic economic output it is not much more than a drop in the bucket.
Better said, it’s not much more than a drop in the ocean, in terms of its contribution to America’s overall economic health. This commentary was directed to the health of the overall American economy and housing’s contribution to it.
On a regional or community level basis, the impact of improving housing production might well be more or less significant than it is at the national level. But those are stories for another time, and each will be unique to the area being analyzed.