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The Role of Housing in Recession Cycles

Contributed by Kimberly Coleman, Prospect Mortgage

Housing plays a substantial role in the U.S. economy. One method of measuring the impact of housing in the economy is to calculate the total amount of capital exchanged in home construction, remodeling, and fees associated with the buying and selling process. Together, this sum is known as the residential fixed investment (RFI). The RFI has averaged 4.8% of the U.S. gross domestic product (GDP) since recordkeeping began in 1947. If you add household-related investments, furnishings and rents to the RFI, the contribution of housing to GDP has averaged about 21% since 1947.

Housing is considered a leading indicator of economic cycles. The housing market will slow in advance of a recession, indicating an economic contraction. Conversely, the housing market tends to expand before the end of a recession. RFI often turns positive one-to-two quarters prior to the end of a recession. In six out of the last nine recessions since 1947, RFI turned positive during or before the final quarter of the contraction.

Most recently, RFI peaked at 6.3% of GDP in the fourth quarter of 2005, the highest level since 1951. RFI fell to 2.4% of GDP in the second quarter of 2009, dipping below the previous low of 3.2% set in the third quarter of 1982. On the rebound, GDP turned positive for the first time in a year in the third quarter of 2009. The RFI increased to 2.5% of GDP. So the current RFI pattern follows the majority of contractions since 1947: RFI was increasing during the first quarter of GDP growth leading out of the current recession.

The latest report for new home sales showed a 6.2% monthly increase. That left the inventory of new homes for sale at the lowest level in nearly four decades. Look for builders to start building soon and the most important component of the RFI — home construction — to increase.

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