Housing Starts Surge; Are Jobs Next?

U.S. housing is staging a rebound! They say good luck seldom comes in pairs, however, I still can’t help but wonder if the labor market will be next. Let’s take a look at the facts, shall we?

Yesterday it was reported that construction of residential homes picked up significantly in September. Housing starts surged by a whopping 15% and hit an annualized pace of 872,000 during the month, printing well above the market consensus of 770,000. Compared to a year ago, housing starts are up by 34.8%, marking the fastest pace of construction since July 2008.

It’s hard to think of the report as a flash in the pan. After all, recent housing figure have been trending higher.

For instance, the National Association of Home Builders sentiment index (NAHB) came in at 41 for October. Although the figure is still well below the 50 baseline reading indicates that optimism on future home sales, it marked the sixth consecutive month of increase and is the highest reading we’ve seen since June 2006.

This is important because the housing market is considered as a leading indicator for job and economic growth. In fact, the NAHB estimates that for each home that is built, three full-time jobs and up to $90,000 in tax revenue may be generated.

Big Ben Bernanke and his buds are probably happy with the recent figures too! Improvements in the housing market could imply that the Fed‘s very loose monetary policy is finally boosting economic growth. Record-low mortgage rates could help strengthen economic growth and may do the trick in reviving construction employment which has shed over 2 million jobs since 2007.

Speaking of jobs, let’s take a look at the correlation between housing starts and non-farm payrolls.

Housing Starts vs. NFP Figures

While not a perfect correlation, we can see that the U.S. labor market started shedding jobs just after housing starts began to drop in mid-2006. Monthly NFP figures were clocking in around the 200,000 mark before the recession hit in 2008. At its peak, jobs losses amount to just over 600,000 in early 2009. Yikes!

The good news though, is that the housing market seems to have stabilized, and that U.S. consumers are now looking to purchase newly built homes. This could be a sign that even more jobs will be added to the market in the coming months.

But before we get ahead of ourselves, there are just other figures I can’t help but ignore.

For one, investments in residential homes only account for 2.4% of total GDP now, down from the 6.3% we saw in 2005. More specifically, new home construction only represents 0.9% of GDP. Back in 2005, its piece of the pie was as much as 3.5%.

Furthermore, the current pace of housing starts is still way below the historical average. Since 1959, an average of 1.27 million new homes have been purchased each year.
There’s also the question of how much the labor market will lag behind the housing market.

For now, all we can do is wait-and-see whether this sudden burst in new home sales is sustainable and is truly the start of a real improvement in the housing market.