Housing Will Soon Help the Economy, but Not by Much: Report

The analysts at Capital Economics are holding fast to their forecast that the downturn in the housing market is drawing to a close.

As a result, they say housing should soon start to boost economic growth, but as housing now makes up only a small share of the economy, the sector is unlikely to add much more than 0.2 percentage points to annual gross domestic product (GDP) growth this year and another 0.2 percentage points next year.
Based on figures from the U.S. Department of Commerce, in the fourth quarter of last year, residential investment accounted for just 2.5 percent of overall GDP. That’s down from the 2005 peak of 6.3 percent and the 1946 to 2008 average of 4.8 percent.
“[A]lthough housing may soon support growth, it won’t help much,” Paul Dales, senior U.S. economist with the international research firm, said in a report released Monday.
If housing had performed as well during this economic recovery as during past ones, then in each of the last two years annual GDP growth would have been roughly 1 percent higher, Dales explained.
“The housing market therefore has the potential to turn the current lackluster economic recovery into something much more vigorous,” according to Dales.
The Commerce Department reported Friday that during 2011 (measured from the fourth quarter of 2010 to the fourth quarter of 2011), real GDP increased 1.6 percent. Real GDP increased 3.1 percent during 2010. The 2011 figure is a preliminary estimate by the federal agency, which plans to issue revised updates to its GDP assessment at least twice over the next several months.
Although housing demand will rise over the next few years, it will remain unusually low, according to Capital Economics. The company says with weak job growth and tight credit conditions likely to continue to restrain first-time buyers, low household formation will keep total housing demand below the normal rate of 1.6 million additional homes a year until 2014.
“It is quite clear that the housing recovery we expect will not be strong enough to trigger a significantly stronger recovery in the wider economy,” Dales said.