This article originally appeared on www.cohnreznick.com.
Editor’s Note: Patrick O’Keefe, CohnReznick’s Director of Economic Research, was a featured speaker at the 2016 National Housing & Rehabilitation Association’s Summer Institute. Below is a brief summary of his presentation; his charts are available here.
Economic Overview: At mid-year 2016, the nation’s Gross Domestic Product (i.e., the market value of goods, services and structures) totaled $18.4 trillion and provided 144.2 million jobs; both are at record levels (chart 1).
Compared to the last quarter of 2007, the eve of the Great Recession, real (i.e., inflation adjusted) GDP was 10% larger (a net increase of $1.6 trillion) and employment 4.1% (5.7 million jobs) higher.
Although the cumulative numbers may appear impressive, you don’t have to be an economist to realize that, spread over eight-and-one-half years, the economy’s performance has been paltry, at best. Indeed, the average rate of growth over the course of this cycle has been the weakest since World War II.
Housing’s Performance: There are a variety of factors that have contributed to the economy’s sub-par pace of growth. But one of the most glaring laggards has been investment in structures, most notably housing (cf., chart 6).
Indeed, inflation-adjusted investment in residential real estate in this year’s second quarter was 10.1% less than in the last quarter of 2007, immediately before the start of the recession. It was a whopping one-fifth (22.9%) less than at the housing sector’s peak in the first quarter of 2006.
This is not to suggest that housing activity has not improved. It has; but its recovery has been slow and is far from complete. Recent sales of existing homes are near their long-term average and homebuilding (led by multifamily construction) has notched incremental gains. But neither are where they should be, particularly with interest rates near historic lows.
Today’s housing prices are 3.3% higher than the pre-meltdown peak in March 2007, but when adjusted for inflation values are still “under water”. That, in turn, inhibits potential activity (i.e., listings of rentals and sales), constrains availability (i.e., units for-sale or for-rent) and discourages increased construction.
Impacts: The impacts of inadequate investment in housing fall most heavily on modest income households, who are increasingly “priced into” certain market segments and forms of tenancy.
From mid-2004, when the national homeownership rate peaked at 69.4% of all occupied housing units, through mid-2016, the share of owner-occupied residences has declined by almost one-tenth (cf., Chart 4). But over that period, 11.1 million residences were added to the U.S. housing stock; 9.4 million tenant-occupied, most at market-based rents.
This is especially challenging for households of modest means as is readily seen in the divergent trends in population and households (cf., chart 5). In the most recent six months, while population increased by almost 2.0 million, the number of households declined by about 350,000. In other words, the housing stock became more crowded.
Outlook: Through 2017, the general economy is expected to continue to expand but at a slower rate. Residential real estate is projected to grow; but with it also likely to decelerate, the imbalances in the housing sector are expected to become more pronounced. For those at the end of the queue, that is not an encouraging prospect.
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