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posted on 28 May 2016

Housings Role In The Slow Recovery

from the Philadelphia Fed

-- this post authored by Burcu Eyigungor

Homebuilding contributed to overall economic growth in every previous U.S. economic recovery since 1947, yet contributed next to nothing in the first three years of the recovery from the Great Recession. Home construction had been such a reliable indicator of recovery that its failure to promptly rebound led economists during the early years of the recovery to repeatedly forecast that a housing turnaround was right around the corner.

The magnitude of the housing boom in the early 2000s was unprecedented, and its effects on the housing sector lingered for years. As I will show, the slow recovery in homebuilding and the economy was partly a byproduct of the fast increase in house prices and homebuilding in the early 2000s. To explore this dynamic further, I examine some key factors at work in this period: What happened on the supply and demand sides of the housing sector during this past boom and bust cycle?


Homebuilding - measured by the amount of money spent on house and apartment construction, including major renovations - is highly procyclical. In every recession since 1947, the share of residential investment relative to the gross domestic product (GDP) has fallen and then recovered during the subsequent expansion (Figure 1). This pattern implies that home construction is more volatile than GDP in general: In a typical recession, residential investment declines more than GDP does.

The second well-established fact is that homebuilding leads the business cycle.1 The recovery in homebuilding starts on average two quarters before the recovery in general economic activity. In that sense, home construction is an important jump-starter - that is, it precedes and makes possible the overall economic recovery. Economists have also pointed out that this lead/lag relationship might be due to monetary policy - that is, lower interest rates first trigger a recovery in housing because of easier mortgage financing, followed by recovery in other activities.2 Residential investment has contributed almost 1 percentage point to real GDP growth on average in the first year of a postwar recovery.

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Source: media/ research-and-data/ publications/ economic-insights/2016/q2/ eiq216_housings_role.pdf?la=en

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