This week the Commerce Department will release gross domestic product (GDP) data for the end of 2012. Given the sustained uncertainty around the fiscal cliff, and recent projections from the Federal Reserve, GDP is likely to maintain current levels or see very minimal growth. But looking past the immediate upcoming winter months, increasing home sales, housing permits, and new construction will likely lead to improvements in GDP.
Even with just a dozen days left until the “fiscal cliff,” President Obama and House Speaker Boehner have still not agreed to the terms of the budget deal. Negotiations over the debt ceiling, tax rates for households with an annual income in excess of $1 million and entitlement spending cuts remain tense. While the fiscal cliff is certainly something our lawmakers should treat with all necessary seriousness, it is likely that the damages that the negotiations will have on the economy have already been done.
Recent economic projections from the Federal Reserve also forecast sustained or even declining levels of GDP growth in the forth quarter of 2012. In 2013, however, GDP is expected to see more meaningful increases of 2.5 to three percent.
So what do changes in GDP mean for the housing market and its recovery, and how are the two related?
Housing contributes to GDP through private housing investment and consumption spending for home goods and services. New private housing units, home sales, and construction have direct inputs into GDP. In November, housing permits were up 26.8 percent year-over-year. In October, existing home sales grew over ten percent year-over-year. Lastly, residential construction has seen gains in starts and completions in recent months. These positive trends point to GDP growth in 2013.
Moreover, GDP is in fact tightly correlated with several housing indicators, and the low projections for GDP in the forth quarter, coupled with the expected seasonal dip in the housing market, may exacerbate one another and lead to a temporary drop in economic performance this winter.
Data from the World Development Indicators and S&P/Case-Shiller Indexes show that home prices follow changes in GDP. This means that although we might see a month or so of declines in home prices, projections from the Federal Reserve suggest that home prices will experience strong increases in 2013.
Homeownership has also been historically correlated with GDP. This correlation should incent policymakers and lawmakers to focus on the housing market and increase deteriorating homeownership levels to further boost GDP growth in the upcoming quarters.
While the course of GDP and the economy seems set in stone for the winter – given the national fiscal cliff debate and the regular seasonal dip in the housing market – the economy is expected to improve in the new year, somewhat on the back of the recovering housing market.