One Explanation for Booming US Growth

Weak home construction was hurting the economy last year—not anymore

Hi! I’m Aziz. My newsletter contextualizes America’s housing market using data visualization—hit reply and let me know what you think.

When we talk about the housing market, we typically focus on transactions and prices. But from the perspective of economic growth, transactions are essentially meaningless. What really moves the growth needle is residential investment—the construction of new homes. Construction has quietly flipped from dragging on growth to adding to it. That’s one reason the US economy is, by some estimates, now growing at the fastest pace in over 20 years.

Housing-related activity is contributing to the bristling pace of economic growth.

By some estimates, the economy is on track to expand by 5.6% this quarter. This would amount to the fastest growth (outside the pandemic) in over 20 years. America is leaving other major economies in the dust.

It’s surprising that housing is boosting growth. When we think of housing activity, we typically think of home sales. The number of home sales being sold these days is as low as the during the darkest days of the 2008 crisis. By most measures, housing is in a deep freeze.

But sales are almost entirely irrelevant for growth. The only measurable activity that comes from one person selling their home to another are fees for the lawyers, brokers, and other intermediaries (plus the spending associated with moving into a new home, which probably amounts to a tiny 0.25% of GDP).

Instead, the impact of housing on economic growth occurs via two other channels.

Housing adds to economic growth through investment and consumption

The first way that housing adds to growth is through “residential investment”: the construction of new single-family and multifamily structures, home remodeling, and the production of manufactured homes (plus the small impact of the transaction-related fees mentioned above).

Construction is related to home sales, in the sense that rising sales and prices spur builders to break ground on new projects. But unlike home sales, residential investment results in measurable transactions that constitute economic activity.

In the country’s economic ledger (the national income and product accounts, or NIPA) residential investment appears under “gross private domestic investment”, alongside other items like corporate spending on research and development, and factory upgrades.

The second way housing drives growth is through consumer spending on “housing and utilities”: the rents and utilities paid by renters, and for owners, the ownership cost imputed from these rents, plus utilities.

Housing services are a NIPA line item under “services” spending—alongside other items like healthcare and transportation.

Housing consumption is a bigger part of the economy than residential investment

These days, the size of the US economy—that is, the value of all the transactions occurring in one year—add up to about $27 trillion. Housing spending—on rent, ownership costs, and utilities—constitute a little over $3trn (around 11% of the total). In the overall economic pie, the slice attributed to housing consumption is more than twice as large as for housing investment.

But investment is much more important for growth

Even though residential investment is a smaller part of the economy than housing consumption, it’s much more important in determining the change in the size of the economy from one period to another (economic growth). That’s because investment is far more volatile. People need a roof overhead year-in and year-out—but home builders will only build new homes if conditions are right.

The volatile “investment” part of housing is what’s helping growth these days

One reason the economy is expanding so rapidly is that residential investment—mainly, new home construction—is rising.

In particular, it’s the building of new single family homes (SFH), rather than multi-family units (ie, duplexes, triplexes, and apartment buildings), that’s adding to GDP. Apartment construction is at a 50 year high, but SFH construction is a much larger market and a much larger employer.

Cynics might rightly point out that real-time GDP trackers estimate that residential investment is slated to add only 0.3% of the almost 6% growth in Q3. But the important thing is that housing is no longer a drag on the economy.

Consider what happened last year: after the Fed hiked rates, single-family home starts plunged. This subtracted almost 1.5% from growth (a big effect, since this time last year, GDP only grew by a tad over 3%). So the additional 0.3% of growth from housing is, in reality, a very substantial swing of +1.8% from this time last year.