- Following an expected 1.8% growth rate in 2011, consensus GDP growth expectations for 2012 are tepid, at 2.1% for the full year
- We expect a rebound in housing starts to directly boost residential investment by a hefty USD 142 billion, which would add about 1.1% growth to US GDP
- Any normalisation of home prices and sales activity could add a further 0.2% via an increase in brokerage commissions
- Further spillover effects in terms of personal consumption; higher home prices may boost consumer spending via the “wealth effect”
- We reiterate that while Eurozone concerns present headwinds for the US economy, developments on the domestic front should see the US economy sustain growth for 2012 and beyond
As of 31 December 2011, the US economy is expected to post full-year growth of just 1.8% for 2011. With the consensus’ GDP growth expectations for 2012 remaining tepid (2.1% full year growth expected, as of 31 December 2011), we believe a rebound in the US housing market could be a key near-term catalyst to spur economic growth. Here, we detail the implications of a housing market recovery on US GDP.
Chart 1: Lowest Share of GDP since 1969
Rebound in housing starts to directly boost residential investment
Residential investment as a percentage of US GDP (see Chart 6) has recently fallen to the lowest levels since 1969, making up a paltry 2.2% of the US economy in 3Q 11, half the historical average of 4.4%. As discussed in How This Overlooked Sector Can Double US GDP Growth (Part 1), housing starts have averaged 602,000 in 2011 (from January to November), less than half the 1.48 million annual average rate since 1959.
Our forecast of a normalised rate of 1.34 million housing starts should more-than-double the current “residential structures” component of GDP from USD 117.8 billion to about USD 260 billion, with this USD 142 billion increase making up a hefty 1.1% of overall US GDP. Note that this does not require us to make assumptions about increases in residential property prices, even from current depressed levels. Should residential property prices rise (in real terms), the boost to GDP will be even larger, with a 20% increase in home prices raising the share of residential structures to 1.3% of US GDP. From a historical perspective, should residential investment’s share of US GDP rise to the historical average (4.4%, from 2.2% currently), that would effectively provide a 2.2% boost to the overall growth rate, more than doubling 2011’s forecasted growth.
Existing home sales also depressed, increases will boost broker commissions
Chart 2: Broker commissions have declined…
Chart 3: … as housing activity slumped
As Charts 2 and 3 indicate, existing and new home sales have declined, resulting in a slump in residential broker commissions, which count towards residential fixed investment in US GDP. Since broker commissions are dependent on transactional volume and prices, declines in both aspects have resulted in residential broker commissions slumping to USD 55.2 billion for 2010, the lowest level in ten years. While commissions are clearly a small portion of overall residential investment, back of the envelope calculations suggest that a mere normalisation of home sales and a 20% recovery in prices will add about 0.2% to overall GDP growth. While this does not appear to be much, consider that this is already more than 10% of the current 2011 GDP growth forecast of 1.8%.
Our analysis of a housing market recovery on residential investment shows that 1.1 - 1.3 percentage points of growth could be added to GDP without requiring any optimistic scenarios, but rather, a normalisation of housing market conditions. Spending on “furnishings and durable household equipment” under the “consumption” segment of GDP has barely budged over the past few years, and the recovery of the US housing market would undoubtedly boost spending in the segment. Also, better conditions in the housing market may provide a positive boost to home prices, spurring other forms of household spending via the wealth effect. While we have not considered these aspects of growth in our analysis, the expected impact on these areas is clearly positive for overall growth.
In conclusion, we think that conditions are ripe for a recovery in the US housing market, with the extent of declines as well as duration of downturn already longer-than-average. Home affordability is at an all-time high based on various measures, while we believe that population growth demographics of the US will require a substantial increase in supply of new homes – we expect housing starts to normalise at more than twice the current depressed number. On the back of our expectations of a US housing market recovery in the near future, we are also projecting a strong rebound in the residential investment component of US GDP, with a mere normalisation of housing activity adding between 1.1 to 1.3 percentage points of growth, while a less robust estimate assuming a normalisation of residential investment (as a percentage of GDP) will see more than 2 percentage points of growth added, more than doubling 2011’s forecasted 1.8% rate.
Two beleaguered aspects of the US economy, the job market and the housing market are both showing signs of life and are poised for a rebound, and we reiterate that while Eurozone concerns present headwinds for the US economy, developments on the domestic front should see the US economy sustain growth for 2012 and beyond. Such developments would be positive for the US economy and corporate earnings growth, and we maintain our 4.0 star "very attractive" rating on the US equity market.
How This Overlooked Sector Can Double US GDP Growth (Part 1)
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