Bloomberg – After eight consecutive quarters of contraction, the decline in U.S. residential investment appears to have ended. A new rebound has begun to remove a major obstacle to the ongoing economic expansion.
With new construction activity at its highest level in more than a year, the Federal Reserve Bank of Atlanta’s GDPNow gauge forecasts residential investment contributing 0.1% to GDP growth in the second quarter. While this may not seem like much, it will be the first positive contribution since the start of 2021.
The new housing market is gradually coming out of stagnation as commodity prices fall and The disappearance of logistical restrictions has allowed builders to push their way through pandemic-era delays. Limited inventory in the resale market is pushing many potential buyers toward new construction, helping to sustain demand even as mortgage rates remain high.
“Construction was at the center of the storm from rising inflation and supply chain turbulence in 2021 and 2022”said Bill Adams, chief economist at Comerica Bank. “Recent good construction news makes it easy to imagine a soft landing, or at least a soft landing for the economy.”
Government data released earlier this week showed new construction increased in May from 2016 Applications for building permits – a proxy for future activity – also increased. The unexpected rise pushed homebuilding stocks to new all-time highs and helped explain why builder sentiment is the most optimistic in nearly a year.
A growing number of prospective buyers are turning to new homes in the resale market, where high mortgage rates have had a big impact. Before the pandemic, existing homes made up about 90% of all homes for sale, which approached 70% in April.
Depends on the outlook for monetary policy. The Federal Reserve has already raised its benchmark interest rate by five percentage points in a year.Further increases could start weighing on new home construction again, said Priscilla Thiagamurthy, senior economist at BMO Capital Markets.
“Now that the Federal Reserve is continuing to signal that rate hikes are still in the works, we won’t see any further progress.” Tyagamurthy said. “If rates rise more than once, it risks the prospect of a hard landing.”
Another risk is that as delays are reduced, the number of homes under construction will decrease Allowing applications to lag behind the pace of new home construction. A high new home inventory may make builders reluctant to ramp up production, which could slow the upward momentum in residential investment.
What Bloomberg Economics Says…
“While the stock market has rallied this year and the housing sector appears to be stabilizing, the worst for credit is yet to come. A slowdown in the economy will cause an increase in consumer and business defaults, which will severely tighten credit to other parts of the economy.
— Anna Wong, Stuart Ball, Elisa Winger and Jonathan Church, Economists
Yet, after deducting from the long period of growth from 2005-2009, At a time when other sectors are starting to cool off, home construction is finally poised to give the economy a breather.
Ahead of this week’s housing data series, Wells Fargo & Co. Economists had expected residential investment to remain a drag on GDP growth for the rest of the year.
“Now, with some of the stronger-than-expected housing data, I would say there is some upside risk to that forecast.”Wells Fargo economist Charles Dougherty said. “We don’t expect a major construction rebound, but a moderate pace seems very likely.”
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