The Independent Market Observer

3/21/13 - Housing Update: How the Recovery Improves the Economy

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Mar 21, 2013 12:25:38 PM

and tagged Market Updates

Leave a comment

The housing recovery continues to become more mainstream. As a front-page article in today’s New York Times announces, “Housing Demand on Rise, Builders Race to Catch Up.” Hard to get more mainstream than that.

Now that the recovery seems to be official, it’s time to dig a little deeper into the story. Housing can boost the economy in many ways, not all of which are readily apparent.

The most obvious boost is the wealth effect. As housing values recover, homeowners feel (and are) wealthier. Mortgage equity withdrawals as consumer ATMs aren’t coming back, I hope, but knowing that you have equity available can encourage you to spend more. Empirical evidence of the wealth effect is mixed, but at a psychological level, at least, it does seem to be in play.

Another direct economic benefit is the construction of new homes, which requires buying lumber and building supplies, hiring labor, and purchasing land. Upon sale, these homes generate mortgage and real estate commissions. In 2012, for the first time in six years, new home construction added to the economy rather than subtracted, amounting to 0.3 percent of the total 2.2-percent growth.

A less obvious direct benefit of the construction revival is the improvement in employment figures, especially long-term unemployment. Think about it: if you’re employed in housing construction, what can you do when no new homes are being built? With the housing recovery, many of those workers are now moving back into employment. In fact, decreases in long-term unemployment have constituted most of the overall decline in the unemployed. Specifically, construction employment rose 6.7 percent on a three-month basis in February—a big swing.

Besides the direct benefits, the housing revival also generates indirect benefits. Demand for building materials has boosted that sector of manufacturing, with a swing from −8.8 percent in July to 17.6 percent in February. It has also generated a 5.9-percent uptick in the production of appliances, furniture, and carpets, all of which are needed in new homes.

Though it’s a relatively small part of the total economy, housing represents a much larger piece of employment growth. Capital Economics, a consultancy we use, estimates that improvement in housing-related employment has accounted for about a quarter of the total new jobs over the past three months. That matters.

A big question is whether the housing recovery can continue. Supplies are at or close to record lows. Meanwhile, pent-up demand from households, which formed during the financial crisis, continues to increase, suggesting that the supply/demand balance remains favorable. Affordability continues at multi-decade highs. At this point, there are no looming factors that would derail the recovery and many that suggest it will continue or even strengthen.

Are we in a housing boom again? Not even close, based on income and affordability—another sign that the recovery can continue. If it does, we can expect to see the knock-on effects continue to grow as well, which should help the wider economic recovery pick up the pace.

All data as of 3/18/13, from Capital Economics United States Economic Update, Housing starting to boost industry and employment

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®