Housing tends to contribute significantly to an economic recovery.Housing - Finance ; Economic conditions

Michael W. McCracken

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 6
T
hree years ago an article1 in this publication dis-
cussed the relationship between housing and the
“R” word—“R” meaning recession, a term no one
wanted to use (lest they jinx the economy) but neverthe-
less were thinking about. Now, after the worst recession
since the Great Depression, we consider a different “R”
word—recovery. The fact that many of the same concerns
in the housing market remain raises this question: How
important is housing in an economic recovery?
Somewhat surprisingly, the housing component of GDP
(more formally known as residential investment) tends to
be a solid contributor to GDP growth during a recovery.
Historically, residential investment has contributed only
about 5 percent of GDP—a small share considering the
consumption component is close to 70 percent. Neverthe  -
less, smaller components such as residential investment do
at times punch above their weight, which is evident when
their effects are measured using growth rates rather than
levels. That is, although residential investment is a small
component of GDP in levels, it can contribute substantial-
ly to the GDP growth rate for short periods of time. 
The chart illustrates the relationship
between residential investment and the
business cycle over the past 35 years. It
plots the rolling 4-quarter percentage con-
tribution of residential investment to GDP
growth. Over the period, residential invest-
ment contributed on average a meager 3
basis points to GDP growth. In contrast,
excluding the recent recession, residential
investment typically contributes at least 50
basis points to GDP growth within two years
following a recession. This suggests that,
although residential investment is not a
major component of GDP growth on aver-
age, its growth typically helps during an
economic recovery. 
However, a year and a half after the offi-
cial end of the recent recession, residential
investment has yet to make a sizable con-
tribution to GDP growth and is, in fact,
presently making a negative contribution. To some degree
this should be expected. The dramatic declines in housing
prices during the recession created a glut of existing homes
either already on or waiting to be put on the market once
prices stabilize and start increasing. This “shadow inventory”
of existing homes substantially dampens the need for new
home construction. 
So does this mean we won’t see continued recovery in
the coming year? Not necessarily. It does, however, suggest
that the contribution from residential investment is likely
to be smaller than normal, or that it may be delayed sub-
stantially. In any case, it should be kept in mind that resi-
dential investment is not the only expenditure component
of GDP. As noted above, consumption is the largest com-
ponent of GDP and, as such, is most likely to contribute
Housing’s Role in a Recovery
Michael W. McCracken, Research Officer and Economist
Housing tends to contribute 
significantly to an economic recovery.
–2.0
–1.5
–1.0
–0.5
0
0.5
1.0
1.5
2.0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Real Residential 
Investment
Percent Contribution
Residential Investment Contributions to Percent Change 
in Real GDP, Rolling 4 Quarters
NOTE: Gray bars indicate recessions determined by the National Bureau of Economic Research.significantly to GDP growth. However, such consumption-
driven growth can also be hindered, at least indirectly, by
residential investment, through its effect on the employment
of construction workers—a group with a current unemploy-
ment rate of over 20 percent and thus unlikely to be in a
spending mood. ■
1 Thornton, Daniel L. “Housing and the ‘R’ Word.” Federal Reserve Bank of 
St. Louis National Economic Trends, February 2008;
http://research.stlouisfed.org/publications/net/20080101/netpub.pdf.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on February 24, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Housing's role in a recovery

http://research.stlouisfed.org/publications/es/11/ES1106.pdf

Housing's role in a recovery

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