Housing Starts

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The following perspective is excerpted from a speech given by Federal Reserve Governor Susan Schmidt Bies at the Eller College of Management Distinguished Speaker Series in Tucson, AZ on January 18, 2007. In it she discusses the recent price declines in the housing market as temporary, with the economy growing strongly enough to be able to absorb contraction in the housing sector:

“The slowdown in the growth of real GDP since last spring largely reflects a cooling of the housing market: Sales of both new and existing homes dropped sharply after their peak in the summer of 2005, the inventory of unsold homes has soared, and the number of single-family and multifamily housing starts has fallen nearly 30 percent since the beginning of last year. At the same time, homes are appreciating more slowly and in some markets prices are even declining.

“Nonetheless, a variety of factors should help limit any remaining contraction in housing demand. For example, despite the 4-1/4 percentage point increase in short-term interest rates over the past three years, the interest rate on a thirty-year fixed-rate mortgage has increased only about 1/2 percentage point, and borrowing costs continue to be relatively low. The ongoing growth in employment and real incomes and the recent increase in the stock market wealth of households should also support the demand for housing. Indeed, the latest data on home sales and consumer homebuying attitudes suggest that the demand for housing may be stabilizing. While much of the downshift in the housing market appears to have occurred already, some further softening in housing starts may yet lie ahead as the inventory of unsold homes is reduced to appropriate levels.

“That said, it is encouraging that the recent weakness in residential construction does not appear to have spilled over to other sectors. For instance, employment has been growing nicely in nonresidential construction, even as it has shrunk in the residential sector. In addition, consumer confidence currently stands a good bit above its long-run average and consumption is still being fueled by past house-price gains, which raised household wealth. This contrasts with previous slowdowns in the housing market, which have typically coincided with widespread economic weakness.”

http://www.federalreserve.gov/boarddocs/speeches/2007/20070118/default.htm

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The following perspective is excerpted from a speech given by Federal Reserve Governor Susan Schmidt Bies at the Mortgage Bankers Association Presidents Conference in Half Moon Bay, CA on June 14, 2006. In it she looks at how the housing industry is a strong factor affecting overall economic growth in the US:

“Activity in U.S. housing markets is slowing. Incoming data point to a decided, but so far moderate, cooling. Starts of single-family houses fell appreciably in March and April. Because construction had been spurred in the preceding months by unusually mild weather, some slowing in the spring was natural. However, the level of housing starts lately has fallen below not just the elevated winter pace but also the pace of last fall. Indeed, construction permit issuance for single-family homes, which is less affected by the weather, has been declining since September. Sales of new and existing homes have dropped noticeably from their highs of last year. In addition, inventories of unsold homes have increased, and your own MBA index of loan applications for home purchases has trended lower in recent months.

“Given the slowing conditions in the housing market, spending for the construction of new housing is unlikely to be an important direct source of overall GDP growth this year, after having contributed close to ½ percentage point last year. In addition, the slackening of house-price appreciation could hold back growth in consumption spending through the so-called wealth effect, or the effect that lower overall housing wealth has on consumption. Estimates from various econometric models of consumer spending suggest that each dollar of change in wealth is associated with a change in consumption of approximately 3½ cents, with roughly half of the effect occurring within a year.

“Of course, these consumption estimates are just that--estimates. Beyond the usual issues of measurement and interpretation associated with any statistical estimate, one can easily point to some specific risks in estimating how housing wealth affects spending. First, econometric modeling has had difficulty distinguishing between the effects of movements in housing wealth and movements in other components of household balance sheets, even though housing may be a unique asset in a number of ways. Thus, the estimate of change in consumption that I cited is based on the historical relationship between spending and changes in overall wealth. Changes in housing wealth may have a somewhat different effect. Second, the linkages between housing wealth and consumption may change over time. For example, these linkages may be stronger now than in the past because financial innovation has made it easier and less costly for households to tap their accumulated housing equity. Third, a pronounced deceleration in house prices could have an outsized effect on consumer confidence, and such a decline in confidence could be an additional damping force on consumption.”

http://www.federalreserve.gov/boarddocs/speeches/2006/20060614/default.htm

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The following perspective is excerpted from a speech given by Federal Reserve Governor Mark W. Olson at the Community Development Policy Summit at the Federal Reserve Bank of Cleveland on June 23, 2005. In it he discusses the concept of the "ownership society" in relation to the goal of many Americans to own their own home. A strong economy increases demand for housing as younger workers 'buy in' and older workers 'move up':

"I'm pleased to be here today to discuss the benefits and challenges of the ownership society. Meetings such as this policy summit are extremely useful forums for exchanging ideas and working toward common goals. And, the goals of those of us involved in community development have not changed over the years. We all want to create healthy, sustainable local economies that provide good jobs, decent housing, and educational opportunities for everyone. At the core of all community development activity is the understanding that individual ownership is one of the most important components of economic and social success, whether in the form of the purchase of a home or an investment in education or a small business.

Immigrants instinctively understand that America is an ownership society and, in fact, come here in search of the ownership opportunities that increase the well-being of family members both here and at home. Immigrant communities often create their own economies, establishing the relationships necessary to support one another in finding work, starting small businesses, pursuing education, and purchasing homes. This model has worked for generations of newcomers to the United States. It exemplifies how each group finds its own formula for success based on its skills, culture, and community norms. "

http://www.federalreserve.gov/boarddocs/speeches/2005/20050623/default.htm

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The following is excerpted from the Beige Book, a publication of the Federal Reserve Bank of Boston. This edition was released on September 7, 2005. Many economists and business leaders look to the Beige Book for guidance on the state of the economy. This excerpt provides an overview of the construction and real estate sectors. Note that this report was released before Hurricanes Katrina and Rita:

"Residential real estate was strong, with signs of softening in some markets. Dallas, St. Louis, and San Francisco reported increased activity, with Kansas City, New York, Philadelphia, and Richmond all observing strong sales, but signs of cooling were evident. Atlanta reported sales above last year's levels in Florida, but demand was beginning to soften. Chicago, Cleveland, Kansas City, Minneapolis, and New York reported residential construction was still strong but down from last year, while St. Louis described it as lagging.

Overall commercial markets grew. Most Districts described conditions as improving from weaker levels. Commercial real estate markets were strong in the New York and San Francisco Districts. Commercial construction activity increased in Cleveland, Dallas, Minneapolis, and St. Louis and was mostly flat in Boston, Philadelphia, and Chicago."

http://www.federalreserve.gov/FOMC/BeigeBook/2005/20050907/default.htm

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The following perspective is excerpted from a speech given by Federal Reserve Governor Donald L. Kohn at a conference on Finance and Macroeconomics sponsored by the Federal Reserve Bank of San Francisco and the Stanford Institute For Economic Policy Research in San Francisco on February 28, 2003. Governor Kohn discusses the housing market in relation to currently low interest rates:

…[H]ousehold investment has stayed unusually strong throughout the recession and early in the recovery, buoyed, no doubt, by low interest rates. As a consequence, it is to be expected that stocks of interest-sensitive investment goods--in the present circumstances, especially cars and houses--are greater than they would otherwise be. And with demand for housing strong, it is perhaps not surprising that house prices are probably higher than they otherwise would be. But judging from the steep upward slope of the yield curve, few see interest rates as holding at current levels indefinitely. When, at some point, interest rates rise to more typical levels, desired stocks of these goods likely would fall, holding other factors equal, restraining this interest-sensitive spending. But it is important to remember that such an increase in interest rates would not occur in a vacuum; it would occur because the economy looked to be growing more vigorously. Most economists expect that a more pronounced step-up in the pace of activity will be brought about by a recovery in business investment from its current subdued levels. In that case, the need for high levels of spending on housing will be reduced. And higher interest rates will be instrumental in bringing about the adjustment in housing expenditures required to keep economic activity from overshooting its potential. In principle, a housing or durables boom induced by monetary policy need not entail a bust that would be painful to the economy. Of course, it is not likely to occur as smoothly as that. Among other things, markets could get it wrong--for example, they could anticipate greater strength in underlying demand than is actually occurring. Then, higher interest rates would tend to damp spending unduly.

http://www.federalreserve.gov/boarddocs/speeches/2003/20030228/default.htm

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The quote below is from the Rhode Island Builder's Association Internet site. In it they discuss the economic impact of new home construction:

"Using surveys from the U.S. Bureau of Labor Statistics, the National Association of Home Builders estimated that the construction of 1,000 single-family homes generates the equivalent of 2,448 full-time jobs in construction and other industries. Approximately 1,125 of these employees work in construction, and 1,323 work in other industries (such as manufacturing, transportation, services and mining). The construction of 1,000 multifamily homes creates 1,030 jobs in construction and other industries. Together, workers involved in the construction of single-family and multifamily housing units collect roughly $79.4 million in wages and generate more than $42.5 million in federal, state and local tax revenues and fees each year."

http://www.ribuilders.org/Public_Info/Housings__Economic_Impact/housings__economic_impact.html

 

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