Housing and American Recessions

Excellent analysis of the housing slowdown and its impact on US economy.

A weak housing sector has accompanied every American recession since 1965, but not every episode of housing weakness has accompanied a recession. An annual drop in the growth rate of residential investment (a good measure of homebuilding activity) of more than 10 percent has coincided with a recession five of the seven times it has occurred since 1965. (In 1967 and in 1995, declines in residential investment occurred without a recession.) A significant drop in residential investment therefore appears to be a necessary condition, but not a sufficient condition, for a U.S. recession.

Housing slowdowns tend to lead recessions rather than result from them. During the second quarter of 2006, fixed residential investment fell at an 11.1 percent annual rate, followed by a 17.4 percent rate of decline in the third quarter. The intensity of the fall in U.S. residential investment during the middle two quarters of 2006 is approaching potential recession territory. The year-over-year drop reached nearly 8 percent during the third quarter. Moreover, moving into the fourth quarter, the housing slowdown is intensifying. Housing starts, another important measure, fell by nearly 15 percent during October, bringing the three-month (August through October) annualized rate of decline to nearly 50 percent.

Still, the chances of a recession in 2007 caused by housing weakness are probably only about one in two. Understanding how recessions result from a weaker housing sector helps to determine the odds of an upcoming recession.

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