Housing struggles as economy grows

by bkrigbaum@solagroup.com

From the NAHB — The Bureau of Economic Analysis (BEA) at the end of January estimated that growth of the gross domestic product (GDP) jumped to a seasonally adjusted annual rate of 5.7% in the fourth quarter of 2009, up from 2.2% growth in the third quarter, suggesting that the economy now has established a firm footing on the recovery path.

Unfortunately, that’s not the end of the story. For housing, for the extremely high levels of the unemployed and underemployed and for consumers, convalescence from the worst recession in generations will be slow.

Things are getting better, but maybe not fast enough to entirely ease the pain.

If the economy continued growing at a 5.7% rate, that would raise some genuine cause for celebration. Unfortunately, growth of that magnitude at this point is generally considered unsustainable. The economy will continue to move forward over the coming year, but at a relatively modest pace that should at least arouse a feeling of gratitude that we have endured the worst and can now prepare for better times ahead.

Inventory replacement made a major contribution to the fourth quarter growth spurt as businesses scrambled to replenish their supplies. Once those inventories have been rebuilt, the question is how soon they will need to be replaced again.

While cash registers will be seeing more action than they did when the economy was still falling off a cliff, goods won’t be flying off the shelves, so inventory replacement won’t be as potent a force behind growth in the period ahead. At the same time, personal expenditures by consumers in the fourth quarter slowed to a growth rate of 2.0%, down from 2.8% in the third quarter.

The most fortifying news for home builders is that after three-and-a-half straight years of reducing GDP growth by an average annual rate of roughly 1%, residential construction is no longer a drag on the economy. Residential fixed investment, which is housing’s share of GDP, grew a robust 18.9% in the third quarter and continued at a healthy clip of 5.7% in the final three months of 2009. Of course, it should also be kept in mind that the first GDP numbers we see for any quarter are advance estimates that are subject to revisions, sometimes substantial, as more data become available.

To gain an even more realistic perspective on the robust-appearing advances that recently have been registered in the general economy and residential construction, it also must be acknowledged that these improvements are coming off extremely low levels of activity.

By many measures, at the bottom of the recession housing production reached its lowest levels since the 1940s, and a couple quarters of positive news have hardly restored it to full health. Meanwhile, nonresidential construction, which held up fairly well through most of the recession, has now fallen for six straight quarters, tumbling at a rate of 18.4% in last year’s third quarter and 15.4% in the fourth.

This can’t be good for the stability of the financial institutions that have been making nonresidential loans, and unfortunately these tend to be many of the same lenders home builders have relied upon for the credit they need to develop and build their projects.

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