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August 15, 2005
Real estate's outsized contribution to economy
Kathleen Bostjancic, an economist with Merrill Lynch, just produced a sobering look at housing's outsized contributions to the economy. While I can't provide a link to the full report, I can provide Bostjancic's thesis and conclusion -- namely, that housing represents a disproportionate share of economic growth, and that even a mere slowdown could have negative implications for the economy...
Bostjancic notes that the housing sector, which typically represents just 5% of the total economy, accounted for a whopping 50% of the overall growth in the U.S. economy in the first half of 2005, and notes that more than half of the private payroll jobs created since the fall of 2001 were in housing-related sectors.
Concludes Bostjancic: "The over-reliance on residential investment leaves the economy very vulnerable if housing demand and prices cool--prices do not need to even fall, just a slowing in the pace of home price appreciation would have a noticeable negative impact on economic growth. Not unlike the fallout following the frenzied tech over-investment in the late 1990s."
She notes that residential investment has averaged 4.5% of GDP over the past 40 years. However with the recent housing boom, its share has moved up sharply to 6%--the highest level since 1978. "And in terms of its contribution to GDP growth, this sector has been doing some heavy lifting, pressing more than twice its weight as it has accounted for 12% of GDP growth."
Forget about the impact that a housing crash would have. Bostjancic persuasively notes that even a mere stalling -- home prices going sideways -- could have implications for the economy. For one, it would cause "cash out refis" to dry up, and could crimp new home construction as well. I think the Federal Reserve has been hoping that businesses pick up the slack, using the record profits they've been banking away to fund a new wave of investment and hiring. But that hasn't happened yet. So if businesses doing pick up the slack, a slowdown of the housing market could by itself cause the economy to stall out.
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Kathleen must read BW:
Real estate and Recession
Posted by: Barry Ritholtz at August 16, 2005 09:27 AM