The industry continues to suffer and remains a drag on the rest of the economy
Following the bubble, the housing market's pain has been deep and persistent. This isn't merely a cyclical downturn. Even six years after the market peaked, the healing process has not yet begun. The industry isn't in recession: it's in a depression.
On Monday, billionaire investor Warren Buffett made this assertion. He's right, but not for the reason he states. Here's the Associated Press quoting what Buffett said to CNBC, via Bloomberg:
Buffett told CNBC on Monday that housing construction is "in a depression, not a recession" because there is still an oversupply of homes.
By digging into the data, the depth of the industry's problems becomes clearer, but it appears to have little to do with the current supply of homes.
Is It a Depression?
Determining whether an industry is in a recession is tough, because there is no such technical definition. So let's create one based on commonly held explanations of what defines an economic depression. Generally, I hear two main criteria -- that output has declined by 10% or that a recession has been underway for 2 or more years. Another characteristic of a depression might be for unemployment to rise above 20%.
The output decline is clear enough by looking at the residential investment component of U.S. GDP. Here's how it has changed since it peaked in 2005:
In the fourth quarter of 2005, residential investment peaked at $783.5 billion. Residential investment bounced at the bottom of its trough at $321.1 billion in both the third quarter of 2010 and again in the first quarter of 2011. It has increased modestly since then. From peak to trough, residential investment was down a devastating 59%. If this doesn't show a depression, I'm not sure what does.
Period of Contraction
Another way to look this picture would be to consider for how long annual residential investment has been declining. Here's a chart, with this year's value projected by averaging Q1 through Q3:
For five-straight years (2006-2010), residential investment has declined. It will either decline slightly again this year for a sixth-in-a-row or remain virtually flat. Again, this appears to satisfy a reasonable definition of depression.
Measuring the unemployment rate for the housing market is a little tougher. Based on Bureau of Labor Statistics data alone, we can only approximate. We can add together residential building construction workers, residential specialty trade contractors, and real estate workers. That last category is likely broader than would be ideal, but we cannot otherwise include workers on the financing side of the equation, so this is the best we can do. Here's how this population of workers has changed since 2005:
The number workers peaked in April 2006 at 5.0 million. The low point was about a year ago in October 2010, when these same categories of workers summed to just 3.4 million. These subsectors have experienced negligible employment growth since then. From peak employment through October 2011, the number of workers in this group is down by an incredible 31%. While an unemployment rate is difficult to calculate, it would certainly be above 20% for this group if none of those workers left the industry. Again, a depression fits.
What About Oversupply?
The strange part is that Buffett talks about oversupply in conjunction with the housing market's problem. To be sure, an oversupply did exist at the peak of the housing bubble and possibly still does. But knowing that there is an oversupply of housing does not necessarily mean that the sector would be in a depression. There was likely an oversupply for some time even towards the latter part of the boom when the industry was thriving.
Moreover, Buffett's contention that there remains a huge oversupply of housing isn't quite right. Back in June, I showed that new construction has been so historically low for so long that population growth is beginning to catch up with housing inventory. The problem now is more one of mismatch: more rental properties will be needed, so what were built to be owner-occupied dwellings will need to be converted to rentals. Here's a chart that shows the dramatic decline in single-family home construction:
Once the rental conversion process has accounted for most of the inventory, construction jobs will begin to return. Although it's hard to know when this will happen, as the chart above implies, construction can't remain at its current very low levels for much longer. Even once those jobs do begin to grow again, however, they aren't likely to reach the numbers seen in 2006 for years.