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Housing Can’t Save the Economy

Both existing and new home sales are on the rise, but no amount of improvement in the housing sector will bring relief to the overall economy, which continues to struggle, according to ""Capital Economics"":http://www.capitaleconomics.com/.


Existing home sales rose 10 percent from January to August, and new home sales rose 30 percent over the same period.

These numbers may continue to be strengthened by the Fed's QE3 announcements, which instigated a decline in the mortgage-backed securities yield from 2.4 percent to 1.7 percent.


Economists at Capital Economics suggest this may bring the 30-year fixed rate mortgage rate even below its most recent record-low of 3.6 percent. The economists envision a possible decline to 3.3 percent.

While this may entice more home buyers, ""the bottom line is that housing is unlikely to become a significant driver of GDP growth,"" Capital Economics states.

The reason, Capital Economics points out, is that housing makes up too small a portion of GDP to have a major impact.

Residential investment made up 2.4 percent of GDP in the second quarter of this year. This is just half the long-term average and well below the 6.3 percent peak recorded at the end of 2005.

The cumulative effect of the past five consecutive quarters of residential investment growth has been a 0.2 percentage point rise in annualized GDP growth.

Thus, while the housing sector may celebrate small victories such as rising sales and an increase in housing starts, the overall economy continues to struggle with unemployment above 8 percent.