With my writing I usually try to keep things practical (namely the topics of financial advising, financial management, investments and any issues particular to Denver), but when I veer off of this I try to stay within “cocktail party” conversations (when topics that usually come up in your casual conversations I hope my readers are empowered with an understanding of things). Predicting the economy and capital markets is difficult, predicting conversations at cocktail parties is easy.

Over the past decade, the housing market has been the greatest source of economic elation (circa 2002-2007) and sorrow (circa 2007-2012). A problem that I’ve seen with investments is when people get too hung up on the nature of the investment. I often tell clients that your money doesn’t care how you made it. Whether you invested in stocks or baseball cards, the only thing that matters is whether or not you have more relative dollars (i.e. purchasing power) in your pocket or less. I think people get hung up on investments like gold because it seems logical: you can touch it, you can wear it, it’s held demand for thousands of years, etc. I think housing is the same thing: it’s a house, people always need it, people take care of it, they live in it, the population is always getting bigger, etc.

The essence of the housing boom (among other things that enabled this) was that we went through a period of time when more houses were being built than households. This was an artificial demand (i.e. people buying houses) that created jobs and revenue associated with housing. One can easily imagine the multitude of jobs that goes into building houses and the real estate industry.

In 2007, the real estate bubble popped (as all bubbles do, no matter how good the soap mixture). The ultimate cure to this has been the slow natural process of forming households (something that is rather difficult to usher along). Today, household formations are regularly exceeding housing starts. Once this dynamic naturally brings the excess housing inventory down, it’s inevitable that we’ll see housing starts pick up and I think people will be surprised at how many jobs are created by this sector again.

The point of interest that I have is: what would the economy have looked like if this bubble hadn’t happened? It’s impossible to normalize the ripple effects of this, but I think that we can get a back of the envelope look at how this effected Gross Domestic Product (GDP) and employment. Further, we can take a crack at what the unemployment rate would be if housing were to go back to a normal trend line.

If we assume that residential housing should have grown with population growth, in 2001 residential housing was $583.3 billion dollars of economic output. In 2001 the US population was 284.97 million and now its 311.59 (a 10-year growth rate of 9.34%). This suggests that all things equal (we’re talking back of the envelope here) residential housing should have increased to around $637.79 billion. Last year, the residential sector accounted for $326.30 of economic output (or what is about half of what would be normal).

For GDP, in 2011, it was $13,315.10 billion dollars. Were housing “normal” it would have been $13,626.59. This would be another 2.34% of GDP. Normally coming out of a recession an economy has a more robust 4-6% growth rate, but this time it’s been more around 1.5%-4%. Were this “normal” residential housing demand in the economy, this recovery would have been more along that normal 4-6%.

Let’s look at employment. Right now the US unemployment rate is 8.2%. There are 139,869,000 employed persons (100% full employment would be 152,362,745 people employed – meaning all those who want a job have a job, which doesn’t happen). Here’s my breakdown of the residential part of our current labor economy from the Bureau of Labor Statistics:

Construction Managers: 926,000

Real Estate Brokers and Sales Agents: 811,000

Construction and Extraction Occupations: 7,125,000

TOTAL: 8,862,000

Strictly using our back of the envelop numbers, if residential construction were to return to normal, it would essentially double the demand in this area of the economy and create 8.8 million jobs. It won’t do that because some of the real estate labor force stuck it out in residential construction accepting a lower income. But let’s say it’s half this number which is 4.4 million jobs. The addition of this to the economy would put unemployment at 5.29%.

The conclusion is: yes, it is housing that still keeping our economy down.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.

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