Steven Gjerstad (presidential fellow at Chapman University) and economics professor Vernon Smith (also at Chapman) connect the dots between the housing market and the business cycle in a recent study. Unfortunately, they don’t like what they see in the current climate. As they explain in an op-ed in The Wall Street Journal that summarizes their research, “If there is no recovery in housing expenditures, confirmed by a recovery in consumer durable goods expenditures, then there is no economic recovery.” And in case you were wondering, there’s no housing recovery to speak of at the moment.
Exhibit A in their analysis is the trend in expenditures on housing as a percentage of GDP. As the chart below shows (courtesy of the paper), this measure of spending “has declined before ten of eleven post-war recessions and the Great Depression” and “it has rarely declined substantially without a recession following soon afterward,” the authors advise. In other words, this metric has proven to be a robust leading indicator of the business cycle.
They also note that spending on new housing has usually rebounded “faster than any other major sector of the economy after every recession since 1920-21,” with the 1980 recession being the only exception. But the 1980 outlier was due in part to the fact that the brief slump that year (it ended in the year it began, according to NBER) was quickly by a new recession—a double dip.
Overall, housing is sensitive to monetary policy and so the sector “responds first to tightened policy and typically first recovers when policy is relaxed.” That leaves us to ponder the fact that the current housing recovery “is the slowest rebound in residential construction in any sustained recovery from a postwar recession,” Gjerstad and Smith write in the Journal. It’s different this time, for a number of reasons.
The bottom line: there’s no housing recovery worthy of the name at the moment, even if the sector has stabilized. It’s clear that new housing starts remain severely depressed, as the second chart below reminds.
Judging by the trend in new building permits issued (see third chart below)–a measure of future housing investment–the prospect for an imminent turnaround in real estate spending still looks dim.
No wonder that Gjerstad and Smith recommend preparing for a protracted economic recovery. Or as they warn, “We are almost surely in for a long slog.” If there’s reason to think otherwise, you’re likely to hear it first (or at least early) from the housing market.