Thursday, December 16, 2010

Housing has become almost irrelevant

Housing starts have been essentially flat for about two years, and have plumbed the lowest level of residential construction activity relative to GDP (slightly over 2%) ever recorded. If construction activity were to decline further, it most likely would have happened by now—no construction company CEO by now could possibly have ignored all the signs of distress and overbuilding and excess housing inventories. Even if activity were to decline further, it would have a de minimis impact on the overall economy. Conclusion: for all practical purposes, housing can only get better, since it can't get much worse. When will the improvement come? It doesn't really matter, since even a 10 or 20% jump in housing starts would have a minimal impact on the economy. Housing will likely turn up well after everything else has turned up, and most things have been turning up for almost a year and a half. Housing is going to be bringing up the rear this time around, for the first time ever. This is a very different business cycle, because it was the only one that was precipitated by a housing crash following a housing boom of epic proportions.


Bill said...


When you say that housing is only 2% of GDP, does that include all the industries that are affected by housing, such as, appliances, furniture, etc. as well as the impact on local property taxes and the jobs that those taxes support?

Scott Grannis said...

No, that is only residential construction. But presumably the other industries you mention are pretty depressed as well, and have been for some time.

brodero said...

The year over year building materials,garden supply and other supply component of retail sales
has correlated well with year over year housing prices...this number is in th +12 range now because of
foreclosed inventory this relationship has lagged but it is
supportive of prices.

Benjamin Cole said...

If you are in residential real estate and allied industries, don't let the toilet lid hit you on your way out.

It is a depression in residential real estate.

Commercial is coming back, but rents of all types are softer than over-ripe bananas.

Still, I think Scot is right. If it gets worse than this there won't be any industry left.

We have fiscal and monetary stimulus in place, although the raw truth is that the handling-the-deficit can just got kicked down the road, and ain't nobody in Scott Grannis' Tea Party doing jackdiddle about it.

We got our tax cuts though, and no cuts in federal spending to favored states and districts.

Public Library said...

Steer CLEAR of real estate for a loooong time to come...

"Japan’s real estate myth began with the end of World War II and lasted 45 years, and its collapse had a major impact on consumers’ behavior. The US housing myth was alive for a full seven decades. Accordingly, we should not underestimate the psychological shock resulting from its collapse."

John said...

Again...depends on the real estate.

There are lots of great values out there for the right people and circumstances.

Merry Christmas, guys.

Benjamin Cole said...

Public Library-

Interesting commentary--I wonder too if US can go through 20-year deflation in real estate and equities. ala Japan.

My guess is that Ben Bernanke knows of what he speaks, having advised Japan on its woes. He recommended to them (as did Milton Friedman) an aggressive QE program.

So, unless Ben Bernanke is derailed by Nipponistas in the US, I think we do not go the Japan route.

I tell you, we are lucky to have an intellect of Ben Bernanke's caliber up there. Somehow, America often calls on the right people at the right time. Like they say, democracy is a crappy system, until you try anything else.

Benjamin Cole said...


Top of the holidays to you too, and I have missed your optimistic commentary, please post a little bit more.

septizoniom said...

you could not be more wrong; the amount of unrestructed debt related to housing is gigantically significant. new production is not the metric

McKibbinUSA said...

I agree that housing starts continue to be flat, and will likely remain flat into the indefinite future...