12/04/2012 08:06 EST | Updated 02/03/2013 05:12 EST

Is a Housing Recovery Possible Without Job Growth?


Housing markets are on a tear south of the border. Against expectations, US housing starts surged to 894,000 units in October, up 42 per cent over last year's number. Some believe this is the real thing, the leading edge of a true and sustainable recovery. Others aren't persuaded, convinced that this is just another flash in the pan. Their reasoning? No jobs, no housing recovery. Are they right?

The logic is compelling. US job growth has been painfully slow, leaving unemployment dangerously high and US consumers unusually gloomy. Small wonder many pundits dismiss the current jump in housing activity as a blip. Who in their right mind would buy a house in a depressed job market?

If their logic is right, then the true housing recovery is a long way off. Employment is well known as a lagging indicator -- when broader economic activity picks up, job growth follows, months later. It makes sense -- following a recession, businesses are understandably reticent to hire. They want to be convinced that the recovery is real. They'll wait it out until they are getting the most out of their current workers, and then hire when they can no longer keep up with orders. Conditions aren't yet that tight in the US, so to date, the economy hasn't seen recovery-style hiring activity.

But there's a key problem with the logic. Housing starts are one of the best-known and reliable leading indicators of economic activity. Homes are built, and when completed, they fill up with large appliances, furnishings and other finishing touches. This late-stage activity is a much bigger part of GDP, spurring broader momentum that in turn creates pressures that ultimately kick up job creation.

Here's the dilemma: if jobs aren't the answer, then what gets the housing market going? Here's how it works: new households, in fact about 1.4 million, are being created every year in the US, and each one needs a new home. Some of these folks are employed, and some households have more than one income. But even these have been reluctant to buy their first home in the last few years. Why? Prices have been sinking since 2005, and no one is keen on seeing their hard-earned down-payment evaporate. These folks are sitting on the sidelines -- staying with mom and dad, renting basement apartments, co-renting with friends -- anything that helps them ride out the price plunge.

When do they jump in? When prices reverse course. As soon as prices start to climb, these folks on the sidelines begin to worry about missing out on the best time to buy. They rush in to the market at that point, and this is what kicks off the boom. What's exciting about the present is that prices have now been rising across the lower 48 all year, and are now up 11 per cent over last year's levels.

What also matters is balance. Huge housing excesses built up prior to the recession, by our count, about eight million units. Since the second quarter of 2010, that number has steadily fallen, and is now well below two million units. By our estimation, the market is now close to balance, a signal that the current rise in starts is only the beginning. The market could sustain two more years of 30 per cent increases, and only just be at the basic level of demand for new dwellings in the US market.

The bottom line? A job surge is not a prerequisite for a US housing boom. But the housing boom now underway is likely to end up creating jobs that will sustain the boom for years to come.

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