A few thoughts on US housing and growth

In early 2007, I was looking at the chart of US housing permits and saw the steep 30% YoY decline. Looking at history, the US always went into a recession when housing starts decline by such an extent. There was no surprise then. Housing starts are such a great leading indicator and they are always ignored. People do not teach Ricardo enough.

Now that the activity seems to have bottomed, we can try a bit of forecasting.

It looks like the US unemployment should peak in the middle of next year below or at 11%. Maybe we get a brief rise in employment now, which makes sense given the strong employment readings in various economic reports (ISM in particular), before a final leg down.

Then we either get a very strong rise in construction activity and employment surprises on the upside, giving credit to the inflation theory camp. Or the recovery is very slow and unemployment goes down 0.5% every year.

On the graph, you can also see how this downturn has been so much worse than recent history.

On the stock front: the house building index has bottomed relatively to the S&P but is not getting any traction (the mean reversion fan will argue it needs to underperform more). It is also quite an amazing leading guide of building activity.

Its performance suggests that house building will remain at those depressed levels for another year.

It is bad news for house prices then - although we can get some strong short-term rises now. I do not buy the argument that lower activity boosts prices now. Maybe in a few years when the market is buoyant.
Consequently, it is not great news for the US GDP growth, which is closely linked to house prices.