Economy Watch: Possible Signs of a Healthier Residential Market

For the U.S. residential market, nothing’s quite been the same since the housing bubble precipitated the Great Recession. But at least new construction starts have been edging upward in recent years and months, and the trend continued in November, according to the Census Bureau this week. Privately owned housing starts in November were at an annualized rate of 1.17 million units, which is 10.5 percent above the October figure and 16.5 percent above November 2014, all of which amounts to improvement in the market.

Single-family housing starts in November came in at an annualized rate of 768,000 units, which is 7.6 percent above the October figure, and 14.6 percent above a year ago. The November annualized rate for units in buildings with five units or more was 398,000, which is an 18.1 percent month-over-month increase, and a 21.3 percent surge year-over-year. Though multifamily tends to be more volatile in its monthly swings, the fact that it continues to score higher annual increases means that developers are still seeing demand for the property type, despite how much has already been developed.

Unlike the existing home sales market, new residential development has a considerable ripple effect on the rest of the economy, considering that the industry employs a large number of workers, as well as consumes a large amount of raw material in the production of housing. Housing contributes to GDP in two basic ways: through private residential investment and consumption spending on housing services. Historically, residential investment (mostly construction of new product) has averaged roughly 5 percent of GDP, according to the National Association of Home Builders, while housing services have averaged between 12 percent and 13 percent (this includes rents and other associated costs).

Builders are still fairly optimistic about the state of their industry. The NAHB/Wells Fargo Housing Market Index fell one point to 61 in December, marking the second consecutive monthly decline in the index after a reaching a 10-year high in October, with all three index components posted losses for December. “For the past seven months, builder confidence levels have averaged in the low 60s, which is in line with a gradual, consistent recovery,” noted NAHB chief economist David Crowe. “With job creation, economic growth and growing household formations, we anticipate the housing market to continue to pick up traction as we head into 2016.”