Real Estate’s Impact on the Economy Is Really Overstated

Here is a statement you have probably heard or read in recent years: Housing is a major economic headwind, and we won't have a proper expansion until it really gets cooking. We saw it in 2009. 2010. 2011. 2012. 2013. 2014. And it's back today-this time, with pundits worried high rents will make it impossible for would-be first-time buyers to save for down payments, dragging down home ownership, real estate investment and the economy. Considering some of us deal with the Bay Area's ridiculous rents, we can understand the sentiment. However, the data show real estate is simply too small to be a swing factor for the economy. It has never been a massive headwind or tailwind, and today's expansion-and bull market-doesn't need a surging housing market.

The myth persists because a big surge in homeownership coincided with the 1990s economic golden age and history's longest bull market-and the drop in homeownership during this cycle coincides with the slowest GDP growth since WWII (Exhibit 1). But that is a lot of coincidence without causation. Take homeownership much further back, and you'll see there is really no relationship with economic growth (Exhibit 2).

Exhibit 1: A Myopic Look at Home Ownership

Source: US Census Bureau, as of 6/8/2015. US Homeownership Rate, Q1 1991 - Q1 2015.

Exhibit 2: A More Meaningful Look at Home Ownership

Source: US Census Bureau and Bureau of Economic Analysis, as of 6/8/2015. US Homeownership Rate and Real GDP Growth, Q1 1965 - Q1 2015.

The homeownership rate is a sociological statistic, pure and simple. It has no bearing on economic growth. Neither does real estate itself, which has ranged from 0.7% of GDP to 6.9% since 1929 (Exhibit 3). Real estate's share of the economy has wobbled wildly over time, but it has always been too small to tip the scales for good or ill.

Exhibit 3: Real Estate's Share of GDP

Federal Reserve Bank of St. Louis, as of 6/8/2015. Share of GDP: Private Residential Fixed Investment, 1929 - 2015.

Here you might think, "yah, but you said that in 2006 and 2007." And, well, we did-and it was true. The housing crash didn't trigger the recession. It was part of the back story, but it wasn't the catalyst. Heck, housing began falling six quarters before the recession started. The real trouble began when mark-to-market accounting began transforming a few hundred billion in loan losses into nearly $2 trillion in paper losses for banks. That rule (FAS 157) took effect in November 2007, just after stocks peaked. Recession began at year-end.

The hype about real estate's economic impact is huge. Real estate's actual economic impact is small. Exhibits 4-13 show GDP growth with and without residential real estate investment in each expansion since 1950. When the blue bars are taller than the orange bars, real estate's contribution is positive. When they are shorter, real estate is a drag. Housing has helped and hurt every expansion at times, and it has had long pullbacks during some of our economy's longest expansions. For all the ink and pixels spilled over the housing boom, real estate's contributions to GDP growth were comparatively small during the 1990s and 2000s. Real estate's contributions during this cycle aren't out of whack with the prior nine. It is one noisy, small component.

Exhibit 4: 1950 - 1953

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q1 1950 - Q2 1953. Inset shows contributions from real estate in percentage points.

Exhibit 5: 1954 - 1957

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q2 1954 - Q3 1957. Inset shows contributions from real estate in percentage points.

Exhibit 6: 1958 - 1960

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q2 1958 - Q1 1960. Inset shows contributions from real estate in percentage points.

Exhibit 7: 1961 - 1969

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q1 1961 - Q3 1969. Inset shows contributions from real estate in percentage points.

Exhibit 8: 1971 - 1973

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q1 1971 - Q2 1973. Inset shows contributions from real estate in percentage points.

Exhibit 9: 1975 - 1980

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q2 1975 - Q1 1980. Inset shows contributions from real estate in percentage points.

Exhibit 10: 1982 - 1990

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q4 1982 - Q2 1990. Inset shows contributions from real estate in percentage points.

Exhibit 11: 1991 - 2000

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q2 1991 - Q4 2000. Inset shows contributions from real estate in percentage points.

Exhibit 12: 2001 - 2007

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q4 2001 - Q4 2007. Inset shows contributions from real estate in percentage points.

Exhibit 13: 2009 - Present

Source: Bureau of Economic Analysis, as of 6/8/2015. Real GDP and Real GDP excluding Residential Real Estate Investment, Q2 2009 - Q1 2015. Inset shows contributions from real estate in percentage points.

This is just one example of how lingering false fears have morphed during this bull market. Housing fears have been a brick in the proverbial wall of worry since the bull began in March 2009, and their continued presence is just one more sign sentiment remains behind reality.