GDP Changes Linked to Housing Market Recovery

By Gretchen Wegrich

This week’s release of Gross Domestic Product (GDP) data by the Commerce Department is an opportunity to better understand the correlation between GDP and the housing market.  Other influencers of the GDP are the fiscal cliff crisis and recent Federal Reserve predictions, both of which indicate that GDP is unlikely to increase in the short term. However, a look at housing market growth, including new construction, housing permits and home sales growth, indicates that GDP improvements can be expected midway through 2013.

As the fiscal cliff looms, negotiations between President Obama and House Speaker Boehner continue to make little progress. Issues such as entitlement spending, debt ceiling negotiations, and household tax rates for incomes above $1 million continue to prevent lawmakers from making critical decisions. Economic damage caused by the fiscal cliff negotiations is already taking place, say experts.

While the Federal Reserve recently predicted unchanged or decreasing GDP levels during the closing quarter of 2012, growth rates of 2.5 to 3 percent are expected in 2013.

So where does this leave the housing market?

The GDP is influenced by housing in various forms, including consumer spending on home goods/services and investment in private housing. Construction, home sales and new private housing units are all direct inputs into GDP. Positive trends in each of these categories, including a year-over-year 26.8 increase of housing permits and ten percent growth in existing home sales indicates GDP will expand throughout 2013.      

Economic performance is expected to dip temporarily during winter months, a symptom of a seasonal drop in the housing market and low GDP predictions during the final quarter of 2012. There is a close correlation between certain housing market indicators and GDP.

Information gathered by both S&P/Case-Shiller Indexes and World Development Indicators demonstrates that home prices mimic shifts in GDP. Despite predicted seasonal declines in home prices, Federal Reserve predictions for GDP suggest that housing prices will be on the upswing during 2013.

Levels of homeownership are also typically correlated with GDP, meaning policymakers and lawmakers possess the ability to boost GDP by improving the rate of homeownership nationwide.

Looking beyond the expected winter economic dip caused by the fiscal cliff and seasonal housing market shrinkage, economic growth is expected to mirror the recovering housing market during 2013. 

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.