Poor data continue to plague the housing market, with US housing starts in December falling -4.3% month-over-month.
History shows while a housing recovery would provide an economic boost, it's not a necessary factor for continued economic recovery.
Personal consumption, business investment, and exports all make substantially larger contributions to GDP than residential construction.
Poor data continue to plague the housing market. But despite its role in the financial crisis, it's not the Achilles' heel of the US economy, and its persisting troubles don't necessarily signal doom for the recovery.
Tuesday's report showed US housing starts in December were below expectations, falling -4.3% month-over-month (m/m) to a 529,000 annual rate. December's reading is the second worst on record, following October 2009's. Based on the long-term historic average, US builders typically start construction on more than one million housing units per year.*
The decline could partly be attributed to harsh weather—December was one of the snowiest and wettest (in the West) on record in US history. Additionally, the expiration of a housing tax credit in 2010 could have pulled demand forward to the earlier half of the year, since it required contracts to be signed by May and closed by October. Negative factors such as competition from discounted foreclosures, elevated vacancy rates, and unemployment may have also contributed to the decrease.
Though housing seems to continue stumbling even as the overall recovery is outpacing its disbelievers, there are some positives. Tuesday's report also showed construction work on multifamily homes (townhouses and apartments) rose 18% m/m to an annual rate of 112,000—marking the first increase in four months. And despite overall housing starts falling, housing construction rose in the West by 45.8% m/m, and a sub-index showed prospective buyers traffic slightly increased in January.
Keep in mind, however, much of housing data have been distorted by government tax credits and policies over the last couple years. Home and mortgage demand has been pushed and pulled forward and backward, compromising how well the data reflect true market pressures.
It's also important to note while a housing recovery would provide an economic boost, history shows that's not a necessary factor for continued economic recovery. Looking at the last 10 recessions and their ensuing recoveries shows even if housing was excluded entirely, GDP would have still historically advanced at an average annual rate of 4% in the first three years of recovery. Additionally, of the 10 ensuing recoveries, in the instances when residential construction activity weakened in the second year, GDP remained positive 3 out of 4 times, even when construction fell at a double-digit rate.
It may seem the housing boom fueled last decade's rapid economic expansion. In reality, residential construction contributed much less to total GDP growth than personal consumption, business investment, and exports—and same goes for today. Positively, these latter three areas have made notable strides in the recovery and seem poised to keep improving in the period ahead.
*Source: NAHB, Thomson Reuters, Fisher Investments.