As we saw with our last post, residential construction is far and away the biggest economic problem for the US right now. So it only stands to reason that the economy isn’t likely to get back to full strength until residential construction is doing better.
We also need to understand how much stronger housing may get. The graph below shows the number of housing permits issued each year since 1959. The Linear trendline shows the gradual rise over time, which is reflective of the growth in the number of households in the country. Since our population continues to grow, we can say with a high degree of certainty that the future trendline is likely to be close to its current level, which is about 1.4 million new units per year.
While we clearly overbuilt from 1996 to 2007, we have also been significantly underbuilding since 2008. At our current pace of only about 600 thousand new units, we can then feel quite confident that the longer we continue to underbuild, the more we will have to build in the future.
This second graph represents housing permits in red (left scale), overlaid with the unemployment rate in blue (right scale inverted). As one would expect, residential construction has a significant relationship to employment.
Based on this relationship, we believe that when residential construction gets back to the level needed to keep up with our growing population, we will have unemployment under 6%. We cannot say with certainty when we will see this construction recovery, but it is very unlikely to be more than four years from now and will probably be more like two years from now.
And this coming resurgence in construction is not just about houses for purchase, as the data above includes apartments.
