TRUE PICTURES OF HOUSING'S CONTRIBUTION TO THE US ECONOMY
What the TV Talking-heads and Wall Street Economists Wouldn't Show You
by Jas Jain
January 30, 2006
A few days ago a Wall Street economist claimed, on CNBC, that the slowdown in housing, no longer deniable, will �shave off half a percent from the GDP growth.� He didn't mean for the 2005Q4, but in the future when the slowdown is finished. We can be certain that the number was not based on any quantification but rather a result of wishful thinking. I set out to quantify the housing�s contribution to the GDP growth, historically, and what does history have to say about how much is likely to be �shaved off� the GDP growth before the slowdown runs its course.
On Friday, January 27th, we had the 2005Q4 GDP report and everyone except yours� truly was surprised by how much weaker than expected it was. Why was I not surprised? Because I have been keying on the Housing Bubble and its aftermath and the slowdown in housing sales and prices since 2005Q3 peak alone �shaved off� more than 1.0% annual rate, as we shall see below, from the 2005Q4 GDP!
A few words on the recent releases of the US housing data. All the reports except the volume, or unit sales, of New Single Family homes were weaker than expected. What the TV talking-heads failed to tell is that the health, or the strength, of the New Homes market is reflected much better in the Housing Starts and Housing Permits and not in the Sales of New Homes already built and on the market. Unlike the owners of existing homes in California who want to sell their homes but couldn't sell for a year, or more, on the market (there were massive listings expirations and withdrawals during November and December in Santa Clara County, for example), the builders can’tsit on the homes for too long without ongoing coasts. The Hopebuilders slashed prices to get rid of the piling inventory of unsold homes. This is evident by the fact that THE MEDIAN NEW HOME PRICES FELL 3.4%, YoY, IN DECEMBER 2005, THE LARGEST SUCH DROP SINCE 1970! The drop was greater from the peak price in 2005Q3. We can also surmise that the average price, not yet available, dropped more than the median price. Also, the number of Existing Homes sold in California was down 16%, YoY, and prices are down from the August 2005 peak. All the price and volume data are down from their peak during 2005Q3.
Quantifying the Housing�s Contribution to the US GDP Growth
For the historical data I have relied on HUD and the monthly releases for the recent data. Up to 2004, the price data used is average for the year. For 2005, I have selected to present two data points in time � peak values during 2005Q3, mostly in August, and the data point for the month of December so that we can gauge the decline from the peak in Q3 to the end of 2005. All data used for volume are seasonally adjusted annual rates; therefore, no need to be concerned about the slowdown during the Holidays. The data series for multi-family units include owner-occupied, or condominiums, as well as rentals. Therefore, I have focused on the Single Family (SF) homes� contributions to the GDP because comprehensive and unambiguous data is available. One can extrapolate the impact of condominium sales.
I have used the following methodology for measuring the housings� contribution to the GDP. For New Homes, if we include the closing costs, cost of moving into the new home, landscaping and other modifications, or improvements, etc., then the contribution to the GDP is at least equal to the 100% of the sale price. For Existing Home Sales, the cost of improvements before the home is listed for sale, closing costs to buyer and seller, moving costs, improvements by the new owner, etc., add at least 15% of the sale price to the GDP. In my opinion, these are conservative estimates. For New Homes, the Housing Starts are a better measure of the current contribution to the GDP than the Sales.
Fig.1 shows the dollar volume of the SF Home Sales. Who could have thought that the SF Existing Home Sales were running at nearly two trillion dollars annual rate? Americans were �Horse� trading big time!
Fig. 2 shows the contributions of New and Existing SF Homes sold to the GDP growth rate.
Fig. 3 shows the contributions of New Homes and Existing Homes sold, combined, to the GDP growth rate. AT ITS PEAK, THE SINGLE FAMILY HOUSING ALONE WAS ADDING 5.45%, OR 3% MORE THAN THE HISTORICAL TREND-LINE CONTRIBUTION, TO THE GDP GROWTH RATE. This peak rate of SF housing�s contribution to the GDP has already fallen by 0.86% by the yearend. If we add to this the decline in the contribution of the condominiums and fall in the indirect contribution due to cash-out refi, then at the very least 1.0% drop in the 2005Q4 GDP is due to the housing slowdown. No?
If I were a betting man, I would bet that the SF Housing�s contribution to the GDP would fall to the trend-line in 2006 and to the low level shown some time during 2007-8. This, folks, means a drop in GDP growth of 3% during 2006 and 3.7% during 2007-8, not including the psychological impact and the shutdown of the cash-out refi�s.
Fig. 4 shows the historical growth in GDP sans SF housing. One can see that since 2001 the GDP growth sans-SF-housing is very poor and the worst since the Double-Dip recession of early 1980s, which was the worst recession since the Great Depression.
Thus far, we have only included the DIRECT contribution of the SF Homes only. As everyone knows, the INDIRECT contribution to the GDP growth, via the cash-out refi, has been great in the past four years, ranging 0.5-3.0% of the GDP, above the historical cash-out refi�s contributions. Another 0.5-1.0% growth can be attributed to the condominium sales, which have been booming more than the SF Home Sales. Fig. 5 is an estimate of the GDP growth excluding the direct and the indirect contributions of the Housing Bubble. If this estimate is anywhere near accurate then the US economy sans Housing Bubble has been in a depression since 2001.
I have presented the facts and the arguments and you can make up your own mind as to where the economy is heading once the Housing Bubble fully bursts and the �slowdown� leads to the historical level of reduced contribution of the housing to the GDP.
Your comments are welcome.
© 2006 Jas Jain
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Tehachapi, CA USA