NCPA - National Center for Policy Analysis

The U.S. Housing Market: Metrics of Recovery and Links to Economic Growth

July 16, 2012

Because of the numerous links between the residential construction sector and the overall economic recovery, construction indicators are among the most important metrics to be used when evaluating the housing recovery. Housing recovery, moreover, is a crucial element of a broader economic recovery, say Douglas Holtz-Eakin, president, and Andrew Winkler, a policy analyst, at the American Action Forum.

The construction of owner-occupied, single family homes is today a mere fraction of its pre‐bubble level. The resurgence of residential construction spending will not come until the excess of distressed properties clears the market and people have the disposable incomes to pursue homeownership. This speaks to the need for the housing market to bottom out and for disposable incomes to increase.

  • Residential construction spending is up 6.2 percent from the beginning of the year, but still far below pre-housing crisis levels.
  • This is largely because there still remains a glut of available housing that is depressing prices and discouraging the construction of new homes.
  • In April, the supply of existing homes stood at 6.6 months, while the supply of new homes stood at 5.1 months; combined, this represents nearly 12 full months of inventory that is presently available.
  • Generally, between 6 and 7 months of inventory is considered healthy -- that the market has nearly twice this amount speaks to the crux of the problem.

The National Association of Realtors has calculated that homeownership is at a more affordable price now than any time in the last decade. This begs the question, why are renters not taking advantage of low housing prices and record-low interest rates and buying homes? The answer is that wages are still depressed, making homes that are cheap nonetheless unaffordable.

  • Growth in nonfarm payroll employment has averaged only 56,000 jobs added monthly since the official end of the recession in June 2009.
  • Perhaps as importantly as the marginal job growth, wage growth has been largely stagnant.
  • The substantial loss in income inhibits the ability of families to pursue home ownership, even when it is at its most affordable level.
  • This inhibition, in turn, has prevented the selling off of accumulated housing inventory and preempted the recovery of the residential construction sector.

Source: Douglas Holtz-Eakin and Andrew Winkler, "The U.S. Housing Market: Metrics of Recovery & Links to Economic Growth," American Action Forum, June 2012.

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