Trends and Cycles in Housing Production

Article excerpt

Housing is a key element of the national economy and of every local community in the United States. Housing production, as measured by residential fixed investment (RFI) in the national income and product accounts, recently has made up about one-fourth of gross private domestic investment and about 4 percent of gross domestic product (GDP).

The stock of owner-occupied and rental housing produces a flow of housing services that are counted under personal consumption expenditures, accounting for another 8 percent of GDP. In addition, about 8 percent of GDP goes for consumer spending on housing-related goods and services, including furniture, appliances, utilities, and other household operation items. Thus, the housing sector of the economy typically accounts for about one-fifth of GDP, dwarfing all other industrial sectors.

Residential fixed investment "drives" housing's role in the economy over business cycles and on a trend basis. RFI includes the production of new units in permanent single-family and multifamily structures, improvements to existing units in such structures, mobile home production, and brokers' commissions on home sales. This component of the economy, which accounts for about 4 percent of GDP on an annual average basis, contributes a much larger share of the change in GDP at certain stages of the cycle, largely because of the sensitivity of RFI to changes in interest rates. RFI typically accounts for about 20 percent of GDP growth during the first year of recovery following a recession; indeed, RFI accounted for nearly 30 percent of GDP growth in the year following the 199091 recession. RFI also turns down early, usually "leading" the U.S. economy into recession.

The balance of this article discusses trends and cycles in the major components of RFI and presents NAHB's forecasts for the production of new housing units through the year 2005. The discussion also covers some trends in the sizes and major characteristics of housing units produced in the U.S.

SINGLE-FAMILY HOUSING

About 1.16 million single-family housing units were built in 1996. Nine-tenths of these were detached units built on individual lots, and the balance were attached or "town house" units. Ninety-eight percent of all single-family units were intended for owner occupancy when built, with only 2 percent intended for rent. The heavy prevalence of detached owner-occupied units should dominate the single-family housing market for years to come.

New single-family homes have been getting bigger and better over time, and this trend is likely to be maintained. As shown in Table 1, the median size is approaching 2,000 square feet. Nearly one-third of new homes now have at least four bedrooms, and [TABULAR DATA FOR TABLE 1 OMITTED] nearly half have at least two and one-half bathrooms. More than three-fourths of new homes now have garages for two or more cars.

With respect to construction method, nearly 95 percent of new single family homes are "stick built" on site. Only 3 percent are constructed with factory-built modular components, and the remaining 3 percent are panelized or precut units. Chronic shortages of skilled labor in construction, along with evolving shortages of framing lumber, are likely to force heavier use of modular and panelized construction methods as we move into the next century.

Figure 1 shows single family housing starts (a start occurs when a foundation is begun), back to 1980, with NAHB's quarterly forecast through 1998 to the right of the vertical line. Major cyclical contractions occurred in the early 1980s and during the 1990-91 recession, but volatility has been relatively mild since then. NAHB is anticipating a mild downswing during the second half of 1997 and in 1998, as part of slowdown in the overall economy engineered largely by the Federal Reserve. Single family starts should gravitate back to about 1.1 million units in the final years of the decade as long as the economy resumes trend growth by then. …