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Craig Greene: The Role of Housing in Recession Cycles

The residential fixed investment sum is a key indicator of what's to come

Housing plays a substantial role in the U.S. economy. One method of measuring the impact of housing in the economy is to calculate the total amount of capital exchanged in home construction, remodeling and fees associated with the buying and selling process. Together, this sum is known as the residential fixed investment.

The RFI has averaged 4.8 percent of the U.S. gross domestic product since record-keeping began in 1947. If you add household-related investments, furnishings and rents to the RFI, the contribution of housing to GDP has averaged about 21 percent since 1947.

Housing is considered a leading indicator of economic cycles. The housing market will slow in advance of a recession, indicating an economic contraction. Conversely, the housing market tends to expand before the end of a recession. RFI often turns positive one to two quarters before the end of a recession. In six out of the last nine recessions since 1947, RFI turned positive during or before the final quarter of the contraction.

Most recently, RFI peaked at 6.3 percent of GDP in the fourth quarter of 2005, the highest level since 1951. RFI fell to 2.4 percent of GDP in the second quarter of 2009, dipping below the previous low of 3.2 percent set in the third quarter of 1982.

On the rebound, GDP turned positive for the first time in a year in the third quarter of 2009. The RFI increased to 2.5 percent of GDP. So the current RFI pattern follows the majority of contractions since 1947: RFI was increasing during the first quarter of GDP growth leading out of the current recession.

The latest report for new home sales showed a 6.2 percent monthly increase. That left the inventory of new homes for sale at the lowest level in nearly four decades. Look for builders to start building soon and the most important component of the RFI — home construction — to increase.

— Craig Greene is a senior loan officer at Prospect Mortgage, 3916 State St., Suite 100, Santa Barbara 93105. He can be reached at .(JavaScript must be enabled to view this email address) or 805.898.4211.

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