Will the Housing Market Drive the US Economy?

US Housing Starts 1959  2011
US Housing Starts 1959 -  2011

After Harvard University released its annual State of the Nation’s Housing Report, economists sparked hot discussions about the future of the US economy and housing market. Some of them believe that the housing market at the beginning of the recession can at last save the US economy. This sounds paradoxical, but it’s not impossible!

Since the recession started, housing starts have fallen sharply. In June 2007, Americans built 1,448,000 new houses, while in April 2009, only 478,000 houses were built. The population is still growing, however, and immigrants are still coming to the country. As Matthew Yglesias pointed out, it will be necessary to build new houses, which will support construction, employment, and the whole economy.

But now it seems that US residents are in no hurry to live in their own houses. Harvard’s report shows that they’re still skeptical about the housing market, and this leads to a huge reduction of homebuyers. It’s important to remember that the previous increase of housing starts was driven not by population growth but by great housing conditions, so many of the houses were only an investment and weren’t actually necessary. Now they can be used as rental houses. As US residents are more cautious and the underwriting requirements are tighter, they prefer renting to buying. Until the government takes action to return trust in loans, or the number of rent houses available drops, Americans won’t have any reason to change their minds. The US will clearly need more houses, but not as soon and not as much as Matthew Yglesias hopes.

However, there is still a rising number of renters, which supports construction, and giving regular income to tenants allows them to pay their debts. Moreover, the aging baby-boomer generation (born between 1946 and 1965) will increase home sales by older people who want to move into smaller houses or nursing homes or who will die. The modest growth of housing starts, the construction supported by renters, and the effects of the aging baby-boomer generation will lead to a slow recovery of the housing market — and with the stronger housing market, the economy will strengthen as well.

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One Response to Will the Housing Market Drive the US Economy?

  1. Wailea says:

    Given today’s strict lending policies, it will difficult to justify expenditures in new construction (spend money/time building something and then have problems with selling). But as REO’s/Short Sales are absorbed by the market, it will become a new opportunity for new construction to commence. Thanks for sharing.

    Reply

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