A few years ago, the National Association of Home Builders (NAHB) initiated a lobbying effort to get Congress and the administration more focused on fixing housing. They called it Fix Housing First. At the time, billions were being spent on stimulus, and the industry argued that more needed to be done to jump-start housing.
Eventually, a special homebuyer tax credit was enacted. During the second half of 2009 and the first half of 2010, an 8 percent credit moved the needle significantly. And when it ended in the spring of 2010, so did the increase in home sales. All the credit did was pull sales forward and they fell precipitously afterward. The NAHB was pushing for a lot more than just a tax credit. They advocated ways to get at underlying issues of the housing crisis, and most of it was never really acted on or implemented.
But four years later, the premise of Fix Housing First looks extremely wise. There has never been a full-blown economic recovery in this country without the housing industry playing a major role. It was true in the past and it was true this time as well.
Housing is now healing. Mortgages are still hard to get, but rationality is slowly returning. Appraisals continue to be a major problem, but prices are stabilizing and in some places improving, which has mitigated this issue somewhat. Banks are beginning to lend to the healthiest among builders. Consumers have improved their balance sheets. Demographics suggest pent-up demand. And interest rates, thanks to the determined efforts of the Federal Reserve, are at historic lows. So it comes as no surprise to builders and to industry supporters that as the housing market heals, so too does the broader economy.
A Deutsche Bank economist by the name of Torsten Slok recently offered analysis that confirmed the direct correlation between the increase in residential fixed investment — home building, home improvements, broker fees, etc. — and the growth of the broader economy. The analysis suggests that the current recovery in housing will add 1.5 percent to U.S. gross domestic product this year. Considering that we are currently pacing at slightly better than 2 percent GDP growth, this is very significant. It takes a borderline recovery and makes it real.
One of the keys to Dr. Slok’s analysis linking housing growth to GDP surprised me. He took the NAHB’s Housing Market Index, which measures builder sentiment, and matched it against GDP. The correlation was striking — each movement in builder sentiment was trailed almost perfectly by GDP shortly afterward. The good news: Though HMI was flat in its most recent reading of 47, it is 22 points higher than it was one year ago.
So it turns out that if you want to know how the economy is looking, just ask a builder.
To read more from the February issue of Professional Builder, click here [2].
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