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U.S. Housing Market Has Room to Run

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U.S. Housing Market Has Room to Run

Even as growth in real residential investment has outpaced overall economic expansion over the course of the recovery, new residential construction is still well below the annual average rates during the 20 years before the boom of 2002-2006. Home prices surpassed their precrisis high just recently, but they still remain nearly 14% below their previous high 11 years ago in inflation-adjusted terms. S&P Global Ratings' economists see room for continued home price increases and expansion in residential construction, given the existing housing supply, the balance between owner-occupied homes and demand for rental units, and pent-up demand from the Millennials.


  • The balance between the number of owner-occupied homes and demand for rental units, along with existing housing supply, favors a continued recovery in house prices and construction.
  • Demographic forces, propelled by the younger generation, may soon provide more of a tailwind to the housing market, reversing the headwind that delayed household formation following the Great Recession.
  • We expect housing starts to reach 1.2 million this year and 1.3 million next year (they averaged 1.1 million the past two years). Pent-up demand and demographic forces should support housing activity in the medium to long run--with new ground breaking likely to average 1.5 million per year in the next decade, in line with the pace in the decades before the boom of 2002-2006.

Given the housing market's role as a key source of several categories in personal spending beyond only residential investments, a sustained--and sustainable--rally in the U.S. housing market is of paramount importance to the world's biggest economy. While residential investment represented a little less than 4% of GDP last year, it punches over its weight class because of the economic spillovers it causes. When residential investments and spending on housing services are combined, they account for a substantial share of the economy--more than 16%. Moreover, housing has strong direct and indirect effects on employment growth.

In the past half century, residential investment--including construction of new single- and multifamily homes, residential remodeling, the production of manufactured homes, and brokers' fees--has averaged 4.4% of GDP. Consumption spending on housing services--which includes gross rents and utilities paid by renters, as well as owners' imputed rents and utility payments--has averaged roughly 11.5% of the economy. Typically, the two components combined have made housing represent 14%-18% of GDP, or roughly one-sixth of what is now an $18 trillion economy. This is a large enough size to affect the speed and trajectory of overall economic growth.

And residential construction, in particular, although only a little more than 4% of GDP, is just as important for the nation's employment picture (chart 1). For example, the effects of the housing bubble were not limited to the construction sector. From 2001 to 2006, according to the Bureau of Labor Statistics (BLS), employment in cement and concrete product manufacturing and in construction machinery manufacturing grew by 5% and 9%, respectively. Employment in the real estate credit industry and the mortgage and nonmortgage loan brokers industry ballooned by 52% and 119%, respectively. And when the housing market crashed, the declines were just as sharp and relatively broad based.


According to estimates by the National Association of Home Builders (NAHB), three jobs are created for every new single-family home built--and the jobs go beyond just the construction sector (see chart 1). While nearly two jobs are created directly in the sector, one additional job is added in areas such as manufacturing, trade, and finance, etc. (Note: for multifamily construction, which represents around 30% of overall residential construction, one job is created.)