In our last post, we discussed the expected increase in economic activity we should see from inventory building due to the very low levels of wholesale and business inventories. In this post, we will discuss the expected impact that housing will have on GDP growth, and it should be substantial.
According to data compiled by the National Association of Home Builders (NAHB), home building and home services (labor, materials, durable goods like appliances, utilities, cable/internet, etc.) since 1980 have contributed between 15% and 18% of GDP. Year Contribution
1980 17.5%
1985 17.9%
1990 17.1%
1995 17.4%
2000 17.3%
2005 18.2%
2010 15.1%
2015 14.9%
2019 14.6%
From 1980 to 2000 the range of contribution to GDP was 17.1% to 17.9%, a relatively standard and narrow range. The Baby Boomer generation (1944-1964) helped drive homebuilding boom as they got married, had kids, upsized, and bought vacation homes.
Over the period, we also saw some political shifts that changed mortgage requirements to increase the number of homeowners. By 2005, that lead to a spike in homebuilding with people becoming overleveraged and often buying multiple homes to flip as prices went higher. In late 2007 that overleverage lead to a housing and mortgage bond market collapse that ushered in the Great Recession in 2008-9 and for more than a decade home building has been running significantly lower (10-15% lower) than the 1980-2000 period.
Homebuilding tends to follow the business cycle, booms lead to increased homebuilding and recessions tend to decrease home building and large generational demographic waves tend to increase the need for more housing. Supply and demand drive markets, and one way to measure supply and demand in the housing market is through the home vacancy rate. As shown in the chart below, the vacancy rate tends to show when there is too much or too little supply in the housing market, and currently, we are at historic lows in supply as measured by the vacancy rate.
That brings in the importance of the Millenial generation (1981-1996) to the shortage of housing supply. Life Cycle Theory describes the general pattern we tend to follow through our lives; birth, schooling, working, coupling, reproducing, retiring, dying. Though delayed by societal changes (increased college attendance, migration to cities, etc.) and the Great Recession from 2007-9, Millenials have moved forward and are increasing 'household formation'. Household formation leads to increasing family size and that usually leads to the need for increased home size which helps to fuel homebuilding. People can also rent homes, but as mentioned earlier, the home vacancy rate shows little supply. We can see in the chart below how that has affected housing starts.
When we buy new homes, we don't just buy a shell. It not only requires paint and carpeting and cabinets but also a stove, an oven, dishwasher, and often a clothes washer and dryer, etc. Also, people tend to buy new furnishings, tools, and for a house, lawn care, and gardening items as well. These larger non-revolving purchases are often called durable goods. In the chart below, we see that durable goods at the wholesale inventory level, like the non-durable levels, have also contracted. This means we'll likely see an increase in the need to build durable goods inventory along with other inventories.
The only question remaining would be whether people and especially Millenials have the capacity to take on the debt needed for a home purchase or the ability to afford a higher rent. Surveys tell us that Millenials are actually strong savers and there is data that point to them being the strongest savers (at this point in their lives) versus other generations. When we look at Federal Reserve data in the larger sense we find that Household Debt Service Payments as a Percent of Disposable Personal Income is at multidecade lows as seen in the chart below. This should mean that people are able to take on mortgage debt.
Wholesale and business inventories are very low, durable goods wholesale inventories have shrunk, housing supply is very tight with a record low vacancy rate, household formation is increasing as the Millenial demographic wave rolls forward, and debt service to disposable income is the lowest in decades. All these factors point to multilevel growth. If homebuilding simply grows from its 2010-2019 level back to the 1980-2000 'average' it will add ~2% annually to GDP growth by itself. Outside another event-driven drop, like the Covid pandemic, there is an unmistakeable scenario for a large increase in economic activity that should go on for years. In fact, at this point, another 'event' would likely only increase the shortages and delay the boom, not cancel it.