July Housing Starts were reported today above expectations, at 1.206 annual rate, the highest in 8 years. It is a strong number. To understand its expected impact on the overall economy going forward, let’s take a longer-term view.
In the chart, I show Housing Starts, a measure of U.S. home building (home sales also mirror this series closely), starting from 1960. The series is highly cyclical – construction rises to an annual rate of about 1.75 million homes (or more in some periods) during economic expansions, and falls to about 1 million for a few months during recessions. This past recession was an exception, however – not only did construction drop to all-time lows around 500,000 homes in 2009, but it also stayed at depressed levels for several years. Even now, at a 1.2 million annual rate, construction is only slightly above the typical low levels of previous recessions.
One important consequence – the rate of home ownership (the orange line on the graph) has dropped to 63.5%, its lowest since records began in 1980. It appears that the limited supply of houses was insufficient to satisfy demand. While there are multiple factors (slow income growth, younger demographics driven by the Millenials), low supply was the key reason for the drop in home ownership, as it led the decline in home ownership by 1-3 years.
The conclusion is simple: in order to satisfy demand and lift the home ownership rate, a considerably higher home building rate is first required. Home construction volume, jobs, and incomes are poised to grow at a faster rate than in recent years. This growth could continue for a long period of time.
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