I’ve never been a big fan of home construction as a driver of economic growth. Way back in 2005 I wrote a piece for BusinessWeek entitled “The Cost of All Those McMansions” :
whether prices level out, crash, or even keep going up, the housing boom is already having pernicious economic effects. The real problem: the incredible amount of resources — workers, materials, and money — being sucked into home construction and renovation….Residential investment has become a black hole, absorbing a staggering 5.8% of gross domestic product….. housing-driven growth, while creating jobs and lifting wealth, is also distorting the economy, benefiting low-tech commodity sectors rather than the high-tech industries at the heart of America’s competitive strength.
(I know it’s chintzy to self-quote, but please forgive me for now).
Housing construction, although it counts as investment in government statistics, has much less positive impact on long-term growth than other types of investment.
However, spending on home construction does have one virtue–most of the money goes to domestically-produced goods and services. A calculation by two BLS economists, Carl Chentrens and Arthur Andreassen (in a paper they presented at the 2009 Federal Forecasters Conference) suggests that only 7% of spending on residential investment ‘leaks’ into imports. By contrast, they find that about 21% of nonresidential investment leaks overseas (that makes sense, since so much business investment goes for IT and transportation equipment, much of which has a heavy import component).
That makes new home construction a much better generator of domestic jobs, in the short-run, than other types of spending. For example, American consumers went shopping for more clothing in the first quarter of 2010. But that uptick of consumer activity sure as shooting didn’t create many clothing production jobs in the U.S.
So if we want job growth–and we do, we do–it’s going to be tough to get a job recovery without at least some improvement in the housing market.