Will Housing Save America's Economy?

 

Housing starts have been at an unprecedentedly low level for a strikingly long period of time. During that period, America's population has continued to grow. Eventually, whatever the economy is doing, Americans require new houses. New houses mean new construction. New construction means new employment.
Courtesy of The Economist

Back in February of 2009, Paul Krugman was worrying about an insufficient policy response to the recession and he pondered the question: if America is to muddle through with too little stimulus, then how will growth return?

Recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. Eventually this leads to an investment recovery, which is self-reinforcing.

He mentions automobiles, but there’s another, somewhat surprising possibility—that housing will lead the way to a durable recovery. This may seem strange to suggest. An epic housing collapse following a massive housing boom helped trigger the downturn. Residential investment has been a drag on growth for five consecutive years.

Matt Yglesias suggested that America doesn't simply face a situation in which housing has failed to keep pace with the growth in population. Since the onset of recession, household growth has fallen short of population growth as families doubled- and tripled-up on housing to economise. There are now nearly 2 million fewer households than one would expect given growth in population.

As economic conditions improve, many individuals and families now living with others in order to save money will seek their own homes. That should spark a period of catch-up household growth, which should in turn spark a large rise in rents and new construction.

A recovering construction industry would help soak up unemployed workers, continuing a virtuous cycle of recovery. After five long years, housing may finally start pulling its economic weight again, or so many Americans must hope.

– The Economist