The primary thing that’s keeping the nation’s economic growth from becoming more robust is weakness in the housing sector.
Aggregate growth measures such as gross domestic product and employment have long since surpassed the peaks set prior to the Great Recession of 2008-2009. But new housing starts remain mired well below the levels of the early years of the century—before sub-prime mortgage lending inflated the bubble that burst during the crash, with disastrous consequences.
The carnage of foreclosures and steep price declines that left many new houses underwater has largely passed. Sales of existing homes are back on an even keel at prices that are steadily rising in many parts of the country. Yet construction of new dwellings that would spur the economy are lagging far below their turn-of-the-century level, let alone the boom-inflated one of a decade ago.
Knoxville is a microcosm of the nation in this regard. Knox County housing starts, as tracked by the Metropolitan Planning Commission, went on a roller-coaster ride from an annual average of about 3,500 units (including apartments) between 2000 and 2003, to about 4,000 between 2005 and 2007, then down to about 1,600 during the crash years, before recovering to an average of about 2,000 between 2012 and 2015. But note that this “recovery” is little more than half the pre-boom norm and that 2015 was weaker than the year before.
Nationally, the picture is pretty much the same. Housing starts for the first five months of 2016 continue to lag at an annual rate of fewer than 1.2 million, well below the pre-boom norm of more than 1.5 million. Measured in a different way, recent residential construction has only been accounting for about 3 percent of GDP compared to 5 percent historically. That’s a 2 percent gap between the relatively skimpy 2.4 percent GDP growth rate in each of the past two years and the growth rate that would have occurred if housing had kept pace with the rest of the economy, which has tended to be the case in prior recoveries over the past half-century.
So what’s causing the weakness at a time when the post-crash inventory overhang has largely been absorbed, population growth continues apace, and mortgage interest rates (borrowing costs) are close to all-time lows?
In trying to answer this question, housing economists site a number of factors. But they usually start with statistics showing that “household formations” have not kept pace with population growth. Which raises the question: What is a household formation? Well, it’s deemed that whenever young adults leave their parents’ home and buy or rent a residence, they create a household. Whether they do it on their own or with five roommates in an apartment, that’s still counted as a single household as distinct from a family household, which the Census Bureau deems can only be formed by a married couple.
Its ability to measure all of this seems dubious to me. But the statistics probably don’t totally lie. And the most recent statistics show that housing formations are running at a rate of well under a million a year, which means less demand for housing.
So why is that? Well, “everybody knows” that in the wake of the Great Recession lots more young folks in their 20s and even into their 30s continued to live with their parents while they sought a job and/or because they were strapped by student debt.
Moreover, couples are getting married and starting to have kids at a considerably older age than even a generation ago, which lessens the formation of family households that are most likely to be home buyers. More stringent credit standards than during the boom-to-bubble period may also be factor, although these have relaxed considerably of late.
Over and above all that, Fannie Mae’s former chief economist, Tom Lawler, now a semi-retired consultant, believes psychology may count for more than economics. “The ethos back in the day was to buy as much house as you can as soon as you can, not only as a place to live but as an investment because prices are only going to go up,” Lawler observes. Now, “Millennials are the first group since World War II who know families that got devastated by the crash. So millennials are more cautious about their financial situation.”
The home ownership rate in the U.S. has dropped from 69 percent to 63 percent at present, and Lawler doesn’t foresee it making much of a comeback anytime soon. Another reason, in his view: Builders are catering to buyers of larger, more expensive homes rather than smaller, more affordable starter homes. The number of houses getting built with more than 3,000 square feet is actually well up at present from the norm of the past, whereas the number with 1,500 square feet has plummeted.
Since people have to live somewhere, there’s obviously been a pick-up in apartment building—but not by enough to make up the slack in overall residential construction.
Numerous surveys point to the prospect that many of today’s renters intend to buy a home at some point. If that materializes anytime soon, their latent demand could actually be a good thing in terms of sustaining economic growth. The recovery from the Great Recession has just hit the seven-year mark, which already makes it one of the longer upswings in U.S. history (albeit one of the less robust). A return to “normalcy” in home building could help extend it beyond the 10-year record set between 1991 and 2001.
Joe Sullivan is the former owner and publisher of Metro Pulse (1992-2003) as well as a longtime columnist covering local politics, education, development, business, and tennis. His new column, Perspectives, covers much of the same terrain.
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