The US Census Bureau released this morning its regular monthly report on US housing starts. News reports were positive, noting that housing starts are rising and are now well above where they were. Starts on private single family homes in August grew by 27% over what they were a year ago to a pace of 535,000 (at a seasonally adjusted annual rate), while starts on all private housing units, including multi-family units such as apartments, grew by 29% over the year ago figure to a pace of 750,000.
Such growth rates are substantial. But looking at the figures over a longer period than just a year shows that the increases, while welcome, are not as strong as they would appear. The housing market remains depressed, with housing construction still far below what a more normal level might be, and even further below where it was during the 2002 to 2006 housing bubble. The graph above puts the recent figures in the longer term context.
The graph shows how new private housing starts (monthly, but at seasonally adjusted annual rates) have moved since 1980. Housing starts can be volatile, but they have never been so volatile (going back to 1980) as the recent boom and collapse. The housing bubble started to build in early 2002, and new starts reached an annualized (and seasonally adjusted) peak of over 1.8 million new units in January 2006. They then fell steadily, and the collapse in the housing market was the major underlying cause of the overall economic collapse in 2008, in the last year of the Bush Administration. They reached a trough of 358,000 in January 2009, the month Obama was inaugurated, a fall of 80% from the peak. Since then they have increased, to 535,000 last month, but remain far below what they had been.
A recovery to the previous bubble peak would be unwarranted (on a sustained basis), as it was the build-up of an excess supply of housing which led to the bubble collapsing. But the American population continues to grow and needs housing, and it is clear that the current pace of construction is insufficient (based on historical patterns). Prior to 2002, new housing starts was on an upward trend, but at a moderate pace. But to keep things simple and conservative, one can take as a reasonable floor of where housing starts need to be as the average in 2001, when 1.27 million units were started.
Based on this conservative benchmark, the new housing starts of 535,000 single family homes in August 2012 would need to increase by a factor of almost 2 1/2 to return to a more normal level. While this is better than where it was last year in August (when it would have had to triple to reach the benchmark), it still has a long way to go.
But as has been noted previously in this blog (see the posts here and here), the shortfall in home construction since the collapse of the bubble indicates suggests a substantial potential, once housing begins to recover. (Note that these earlier blog posts focused on new home sales, while the current post focuses on the broader concept of new home starts. The starts figure includes starts of home units that would not only be sold, but also those which would eventually be rented, whether by original intention or because the new home could not be sold, plus homes which were built by or for a specific owner.) The need for new homes remains, as the population continues to grow. In the short-run, families double up, or adult children continue to live with their parents, as was discussed in the blog posts cited above. But as soon as they are able, these people want to buy their own homes.
Based on a 1.27 million units per year norm, the graph above shows the excess of new homes (shaded in blue) between 2002 and late 2006, and then the deficiency (shaded in red) since then to now. Based on this norm, the excess of housing started during the bubble totaled 1.3 million units over the full period. This excess has now been more than worked off. The cumulative shortfall (shaded in red) comes to 3.9 million units, or triple the previous excess. Stated another way, there is now a shortfall of a net 2.6 million single family housing units. There will be pressure to catch up on this once the economy, and the housing market, begins to recover.
Such a catch-up on the accumulated short-fall in new home construction of recent years could serve as a significant stimulus to the economy, as was discussed in the blog posts cited above. Other commentators, such as Paul Krugman recently, have noted this as well. But while such a stimulus to demand would be welcome, one needs also to recognize that fiscal drag has been quantitatively more important than the collapse in residential construction in explaining the lack of a strong recovery from the 2008 collapse. This was discussed in a posting on this blog from last March. Residential construction is only 2.4% of GDP currently, down from over 6% of GDP at the peak of the bubble, and about 4% of GDP in more normal times. Government consumption and investment (as in the GDP accounts) is about 20% of GDP, and total government spending (including transfer payments, such as for Social Security or Medicare) is 36% of GDP. Government is a much larger share of the economy than is residential construction. Because of this, reversing the fiscal drag resulting from the scaling back of government expenditures in recent years (particularly at the state and local level) and allowing it to grow as it had during the Reagan years, would add more to the economy than a recovery in housing, welcome as a recovery in housing would be. Numbers are provided in the March post cited above.
In summary, while there have been recent positive signs, housing construction remains depressed. However, because housing construction has been so depressed for so long, there is now a shortfall in housing units relative to what is needed for a growing population. Hence a recovery in new home construction should be expected as the economy begins to recover, and could lead to a doubling or tripling of new home construction from where it is now. This would be a welcome stimulus to the economy. But welcome as this would be, allowing government expenditures to recover would make an even larger contribution.