Strictly speaking residential investment provides only a modest contribution to GDP.* Yet it has considerable spillover effects on other parts of the economy.
Rising real estate prices have a positive wealth effect and helps drive discretionary spending. Data show consumers are quicker to spend an increased portion of their housing wealth than their stock wealth.
Nearly 70% of GDP is based on consumer spending and 1/3 of all personal spending is on goods, according to the Bureau of Economic Analysis.
Currently in much of the US, housing prices are 50% above their pre-financial crisis peak.
For the Denver-metro area, prices are about 90% above their previous peak. For example for the Denver area the pre-crisis peak average home price was $276K while today the average is $519K.
Increasing income is a major determinate of housing demand and growth in personal income is set to accelerate in 2019. Along with steady or declining interest rates - a major factor affecting home affordability** - housing prices are only likely to continue their rise.
However in light of overall affordability housing prices are not expected to rise as dramatically as in prior years and maybe not at all in areas that have already appreciated at a rate much higher than the norm.***
At the national-level a second wind for the housing market would have knock on effects for the broader economy helping extend the current record-long expansion.
Weekly Update, Week ending April 26, 2019
The S&P 500 was up 1.21% even as the Dow Jones lost -6bps, the Russell 2000 increased 1.67% and the Nasdaq added 1.86%.
As for US bonds, they added 48bps.
Globally, the MSCI World Index added 68bps and the Barclays Global Aggregate Bond Index increased 5bps.
The Euro Stoxx 50 added 26bps in local-currency (Euro) and lost -34bps in USD. Meanwhile, the Topix was up 19bps in local-currency (Yen) and 55bps in USD.
*Residential real estate investment includes construction of new homes and apartments, remodeling, production of manufactured homes and brokers fees. Such activity contributes 3-5% of the total GDP.
**Generally a 1% decrease in the real mortgage rate increases real housing prices by around 2%.
***Yep, lookin' at you Boulder/Denver.
