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The Housing Bottom and the Unemployment Rate

The Housing Bottom and the Unemployment Rate

by Bill McBride on 10/15/2012 

Early this year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn’t obvious to everyone. Now it is, and here is another update to that graph (and a repeat of some analysis).

Starts, new home sales, residential InvestmentClick on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the current housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom – something a number of us predicted given the overhang of existing vacant housing units.

Housing plays a key role for employment too. Here is an update to a graph I’ve been posting for a few years. This graph shows single family housing starts (through August) and the unemployment rate (inverted) also through September. Note: there are many other factors impacting unemployment, but housing is a key sector.

Housing Starts and Unemployment RateYou can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn’t hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit – and then declined again – but mostly starts moved sideways for two and a half years and only started increasing last year. This was one of the reasons the unemployment rate remained elevated.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation – and that leads to even more demand for housing units – and more jobs, and more households – a virtuous cycle that usually helps the economy recover.

However, following the recent recession with the huge overhang of existing vacant housing units, this key sector didn’t participate. This time the unemployment rate started falling before housing starts picked up.  Going forward I expect housing activity to increase and help push down the unemployment rate. Unfortunately I expect the housing recovery to be somewhat sluggish.

Read more at http://www.calculatedriskblog.com/2012/10/the-housing-bottom-and-unemployment-rate.html

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About that “Housing Recovery” — PragCap

About that “Housing Recovery”

I am beginning to see the term “housing recovery” all over the place these days.  I googled “housing recovery” and narrowed the results down to the last 30 days and 3,900 results show up.  It sure seems like the “housing recovery” has become a widely accepted fact.  Now, I’m no longer some big housing bear like I was for so many years.  I actually don’t think there’s much downside in US residential real estate, but I also think we’re getting a bit ahead of ourselves here.      Let’s take a look at the data just for some broader perspective.

The most damning chart for the “housing recovery” is house prices themselves.  What’s sparked all the recovery chatter?   Strangely, it’s been that 2.5% spike off the bottom.  The current bounce is actually much weaker than the 6%+ spike we saw in late 2009:

Okay, but prices aren’t everything.  Surely, the underlying data is starting to look better also, right?  I guess it’s all relative and in this bizarro Great Recession world where “good” would have once been considered “bad”.  The next few charts are just big broad housing indicators.  As you can see, they’ve certainly “recovered”.  Recovered right back to some of the worst levels in US history:

Housing Starts

Building Permits

New Home Sales

I hate to rain on the parade here because housing stability has been a huge factor in my “no recession” call over the last year +, but I think we have to keep some perspective here as well.  I don’t know what the technical definition of a “recovery” is in economics, but this is not a “recovery”.  It might be a “stabilization”, but let’s not go all crazy abusing the english language here.  I was a housing bear for years and years and I am infinitely more optimistic about the state of US housing here.  But let’s be honest here.  This is no “housing recovery”.

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