More on the GDP trend and housing

In the previous post, I mentioned that we are still in a supply shock when it comes to housing. Figure 1 was in that post. Real residential investment (red) is no higher than it was before Covid and the price level of inputs is still at cycle highs. The recovery hasn’t even begun.

Figure 1

My point in that post was that there is plenty of kindling here for above trend real growth and below trend price inflation.

I think Figure 2 can highlight the interplay between residential investment and GDP trends that I described in that post. From 2008 to 2015, residential investment was below any post-WW II range - below even the deepest recessions.

Figure 2

You might be tempted to imagine that the post-2008 bust was payback for the big pre-2008 boom. But, brokers’ commissions are included in the published residential investment number. They are high because the low amount of residential investment has increased the prices of existing homes, and they don’t really belong in that measure for purposes of estimating the growth of the housing stock. Also, as the nation matures, more of residential investment is for maintenance of existing homes. The first adjustment makes the pre-2008 boom pretty average compared to pre-1980 investment. The second adjustment puts net residential investment in structures lower than practically any time between WW II and 1980. There wasn’t really a boom.

Figure 3

Back to Figure 2, my point is that during the time from 2008 to 2015, residential investment was unsustainably low. Americans aren’t going to permanently keep lowering the real value of our residential structures. GDP growth during that time was unsustainably low. By 2016, residential investment was at least back up to a proportion of GDP that would have previously been considered recessionary. And, sine then, GDP growth has trended at near 5%.

Figure 4 is a measure I post a lot here - real housing value per capita. This was also updated through the 4th quarter. Real housing value (the result of residential investment) is growing again after a decade of stagnation. (Here, this refers to rental value.) Again, that 2008-2015 period is really weird. We shouldn’t be benchmarking anything to that period, especially housing. (One tell that an analyst or pundit is biased about housing is if they benchmark their analysis to 2012. That was basically the bottom of the market, in many respects. That’s like benchmarking your personal health to when you were in a coma. They are just insisting on having a one-sided point of view. It would be impossible to ever be bullish on housing if you benchmark to that period. It’s very common, unfortunately.)

Figure 4

NGDP averaged about 5% from the 1990s to 2008. Then there was a shock. Then a period of 4% average growth. And, growth has averaged about 5% since 2016. You can basically see where all those trend breaks were by looking at real housing value per capita.

Figure 5 may also add some useful visuals here. Here, I have separated residential investment between the real component and the price component, like in Figure 1. But, here, they are relative to aggregate GDP. How much has real residential investment changed compared to real GDP? How much have the prices of residential investment inputs changed relative to all prices in GDP?

Figure 5

There is a long-term cost problem in housing construction. But, specifically, there was about a 15% additional price shock, after Covid.

And, I think the real residential investment measure here is interesting. I have noted that the apparent building boom in 2020 and 2021 was mostly just partially completing homes that were just sitting in the queue waiting for bottleneck inputs. Most of those homes in queue have washed out as residential investment declined in 2023. In Figure 5, you can see that the apparent boom wasn’t really even much of a boom, in proportion to total real GDP growth. In real terms, we are still well below any pre-2008 recession.

It seems like there’s a bit of a disconnect between Figure 4 and Figure 5. How has housing (rental) value gone back to an uptrend while residential investment is so low? Figure 4 is per capita. Between Covid deaths, lower birth rates, and the pause in immigration related to Covid, population growth really tumbled. Much of that was temporary, so residential investment will probably need to rise substantially to keep that measure rising.

And, on immigration, it looks like the MAGA grifters will be making that a talking point. And, NIMBYs in places like LA also like to blame immigrants for their housing problem. It is common to hear immigrants blamed for high housing costs from many camps.

Keep Figure 5 in mind when you hear those comments. They probably don’t realize it, but anyone making those statements has a very low opinion of America’s productive capacity. Real residential investment is half of what it commonly was in the past, relative to other real production. Of course we are capable of much more. Of course, every outgroup (Private equity, corporate investors, short term rentals, etc. are all frequently blamed for high costs as well.) will appear to be the source of the problem as long as we are in this state of deprivation. To think we aren’t capable of more is to think we are failures.

America’s boosters and supporters deserve our attention, not such detractors. Those families swimming the Rio Grande know what America is capable of. They deserve our attention. They deserve the mantle of “American”. We can’t allow policy to be written by those who presume fecklessness and failure.