For months, a wide range of indicators of the state of the housing market have been pointing to improvement, with evidence that prices, sales and construction activity are all starting to rise after five lean years. It is still anybody’s guess how long the upswing will last and whether the worst is truly over for housing. But Wednesday’s numbers are the most solid evidence yet that the improvement is for real.
First, it helps to understand how deep, and sustained, this housing depression has been. Residential investment — essentially, housing construction and sales activity — has been below 3 percent of gross domestic product every quarter since the fourth quarter of 2008, closing in on four years.
Before this downturn, it had never fallen below 3 percent for even a single quarter (the data go back to 1947).
Even in the deep and traumatic 1981 recession, home building never experienced a single quarter as bad as those that have been seen continuously for the past four years.
Part of those dire results are surely attributable to correcting the excesses of the housing bubble, roughly from 2002 through 2007. (As measured by residential investment, the housing boom peaked in the third quarter of 2005, and building activity had fallen to roughly normal levels by the summer of 2007. It was in 2008 that it fell precipitously.)
Here’s the thing, however: The overbuilding of houses during the boom years, while real, was not extraordinary by historical standards. The underbuilding of houses has been far greater than the excess housing construction during the boom relative to demographic trends.
That means that other factors are probably major culprits in the housing weakness of the past four years: A terrible job market that has made people unwilling or unable to get a mortgage, an overhang of foreclosures that has kept the market for houses from clearing and extreme caution by banks and other lenders that has made it hard to get mortgages.
Now each of those trends seems to be healing. Few would argue that a return to the housing bubble days of 2005 is attractive, but what if, over the coming year, housing returned to its longer-term trend?
In the second quarter of 2012, residential investment was 2.39 percent of GDP. As a rough estimate of the longer-term trend for that number, let us use its average level for the entire decade of the 1990s: 4.07 percent. (Using the 1990s is a bit arbitrary; even using various other base lines yields similar numbers.)
If residential investment converged to that longer-term average, it would add 1.7 percentage points to overall growth in the coming year.