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Housing goes from drag to tailwind for US economy in 2020

More than a decade since a housing-led financial crisis cratered the U.S. economy, homebuilding is once again contributing to growth in the U.S. economy.

A combination of falling interest rates, rising wages and a declining housing stock has driven an acceleration of residential development. New starts of privately owned housing jumped to a 14-year high in December 2019, with a seasonally adjusted annual rate of 1.6 million units, a 16.9% increase from November and a 40.8% jump from December 2018.

The surge in building is the latest sign that the U.S. consumer is well placed to support economic expansion in 2020 even as global economic headwinds from trade, Brexit and the new coronavirus threaten to be a drag on growth.

However, there is still a long way to go to reach the level of residential construction before the financial crisis. The level of new builds is still 29.3% lower than the peak of 2.3 million in January 2006, and highlights the extent to which the recovery in house building has lagged behind other areas of the economy.

Consumer spending, for instance, returned to its pre-financial crisis peak in 2010.

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A healthy housing market's contribution to GDP growth is twofold, according to Nancy Vanden Houten, lead economist at the consultancy Oxford Economics.

"Gains in housing construction will boost employment and income," she said. "Also, homeownership can boost wealth, which over time can give a lift to consumer spending through a wealth effect."

Residential investment, which captures new construction, improvements to existing structures and broker commissions on sales of new and existing homes, has been a declining factor of U.S. GDP, with its contribution slipping from a 50-year high of 6.7% in Q4 2005 to as low as 2.4% in Q3 2011, and was 3.7% in Q3 2019, the latest reading from the Federal Reserve Bank of St. Louis. It averaged 4.9% from 1947 through 2007.

But the indirect impact of consumer spending, more formally known as "consumption of housing services," which includes rents and utilities paid by renters and comparable figures for homeowners, is a much higher number, suggesting that an expanding housing market can have a significant knock-on effect for the economy.

Personal consumption on housing and utilities contributed 12.7% to GDP in the fourth quarter of 2019. In 2019, 681,000 newly built homes were sold, an increase of 10.3% on the 2018 level, according to the U.S. Census Bureau.

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Availability of new housing is tightening, with supply down to just 5.7 months in December 2019, having been 7.4 months a year earlier.

Source: AP Photo

Demand on the rise

Although sales of newly built homes disappointed in December, dropping 0.4% from November, Mark Vitner, senior economist at Wells Fargo Securities, expects an increase in inventory and strong demand to result in a pickup in early 2020.

"With mortgage rates low and builder optimism rising, we expect sales to be solid again in 2020," Vitner wrote in a research note, suggesting the improvement in housing "should offset some of the drag being exerted on the economy from sluggish global economic growth."

House builders are under pressure to increase supply. The seasonally adjusted estimate of new houses for sale at the end of December was 327,000, this represents a supply of 5.7 months at the current sales rate, down from 7.4 months in December 2018.

That could push up house prices, which fell less than new house starts in the wake of the crash, and returned above the precrisis peak levels in January 2018, according to the S&P/Case-Shiller 20-City Composite Home Price Index.

Higher prices could put off some buyers, said Wells Fargo's Vitner.

However, homebuilders are working hard to increase supply. The Dow Jones U.S. Home Construction Index has climbed to the highest level since August 2005.

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U.S. investor Guggenheim Partners, which has $270 billion under management, put U.S. housing first in its 10 macro themes to watch in 2020, noting "mortgage rates have come down a full percentage point over the past year, helping home sales and construction recover, a trend which will continue into 2020."

The 30-year fixed-rate mortgage average was 3.51% as of Jan. 30, down from 4.51% a year earlier, according to data from home loan provider Freddie Mac.