Lost in all of the recent chatter about the election, the fiscal cliff, and the pending debt ceiling debate is the fact that the momentum in the U.S. residential construction and real estate sectors is accelerating. Ever since the housing bubble burst in 2008, these sectors have been a drag on economic activity. And there is little doubt that it will take a few more years for the sectors to heal completely. Nevertheless, after four years of scraping along the bottom these markets are now healthy enough to start contributing to overall economic activity.
Through October, the year to date total for the number of new houses started in the U.S. is a whopping 28% higher than the same period of a year ago. Our forecast calls for a rise of 30% for all of 2012 followed by a gain of at least another 20% in 2013. The trend in the housing starts data is very important for the U.S. economy because this sector generates a lot of jobs, and it is also the best indicator of Americans’ willingness and ability to spend money on durable goods.
This trend in the data of new home construction is matched by the trend in the data on sales of existing homes. An active real estate market means not only that homeowners can readily sell their homes if they wish, but also that they can borrow money and use their homes as collateral. The lack of access to credit has been one of the major constraints to the recent recovery in the U.S. economy. But increased activity in the real estate sector will help to ease credit conditions, which will create more activity in real estate, and so on, thereby creating the self-reinforcing recovery.
But perhaps the most welcome trend in recent months is the ex-celebrating the increase in home prices. Rising home prices give households confidence about the future. Economists call this the “wealth effect.” Rising home prices will result in fewer foreclosures, and they will enable banks to get out from under bad loans. Local tax revenues will go up, and this will enable municipalities to hire more teachers, policemen, firemen, and municipal workers. In short, our economy works very well when house prices are steady to rising.
A strong economy is essential for not only the construction trades, but also the entire manufacturing sector. As money begins to flow, new tooling projects will be released. Households will purchase more motor vehicles, appliances, home furnishings, and electronics. So even if your shop is not a direct supplier to the residential construction sector, you should continue to monitor the aforementioned trends.