Will Housing Save The US Economy?
By James Picerno, Director of Analytics
It’s a tall order but housing’s enjoying a V recovery and history suggests that this key slice of the economy plays a critical role in the business cycle. Is this a macro silver bullet for 2020 and beyond?
Housing’s role as a leading and arguably dominant force in the business cycle, for good or ill, has been documented in numerous studies over the years, including a 2007 paper that summarized its findings with the informative title: “Housing IS the Business Cycle.”
The reasoning: new construction and sales of homes unleashes a wide range of economic activity, such as purchases of home furnishings and building materials–purchases that have far-reaching secondary and tertiary effects. Of course, the housing effect is a two-way street and so when the sector slides it has an outsized negative effect on the economy.
Housing was certainly a potent factor in the Great Recession of 2008-2009. In 2020, housing is considered a positive force that could lead the economy out of the coronavirus recession.
Tim Duy, an economist at the University of Oregon, reminds that the sharp rebound in housing demand is encouraging. “What stands out in this recovery is the V-shaped recovery in key cyclical sectors of the economy such as housing:”
Sales of existing homes, a much larger marketplace, have also rebounded sharply in recent months. Sales in this corner jumped to a 14-year high in August.
“[New] home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market,” says Lawrence Yun, chief economist at the National Association of Realtors, which publishes the data. “Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”
Construction of residential housing has also bounced, although housing starts and newly issued building permits (a leading indicator for starts) pulled back in August. The lower levels mark the first time since April that the building activity eased.
It’s unclear if the August stumble in starts and permits is an early warning sign or noise. But with new jobless claims still rising dramatically each week, it’s too soon to conclude that housing’s recovery to date will continue. If the ranks of the newly unemployed continue to surge, the headwinds that flow from this trend will eventually spill over into housing.
On the other hand, home builders are bullish in the extreme. This month’s NAHB/Wells Fargo Housing Market Index (HMI), which tracks sentiment in the industry, reached a record high. “The suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates,” observes NAHB Chief Economist Robert Dietz. “In another sign of this growing trend, builders in other parts of the country have reported receiving calls from customers in high-density markets asking about relocating.”
Economist Scott Grannis connects the dots and asserts that the surge in homebuilder sentiment will keep the housing sector humming. The sharp increase in confidence “foreshadows a significant pickup in housing starts,” he writes, highlighting the implied connection between HMI as a leading indicator for construction activity.
The key variable, of course, is the economy’s ability to mint new jobs. Consumers ultimately dictate the housing trend and so employment is especially critical these days since payrolls need to expand at a strong rate to overcome the huge numbers of newly unemployed workers. The margin for disappointment, in short, is thin at the moment.
Payrolls have, in fact, been rebounding sharply after the coronavirus crash wiped out more than 21 million private-sector jobs in March and April. The directional bounce is encouraging but the employment gains to date have recovered only about half of the previous loss.
The critical question: Will the labor market continue to rebound and at a pace that’s strong enough to offset the layoffs and deliver a meaningful growth boost for housing and the broader economy? Cautious optimism prevails ahead of this week’s September numbers for payrolls.
Tomorrow’s ADP Employment Report is expected to post a pickup in growth for this month, although Friday’s official payrolls release from the Labor Dept. is on track to post a softer gain, based on Briefing.com’s consensus point forecasts.
The one thing that all economists can agree on at the moment: the business cycle is unusually vulnerable to weaker-than-expected jobs data. Indeed, if the revival in payrolls stumbles, housing will have a hard time breaking free from that gravitational pull.
(An earlier version of this article first appeared at The Capital Spectator.com on September 29, 2020.)