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By Jason Stipp and Robert Johnson, CFA | 12-19-2012 12:00 PM

How Much Can Housing Help the Economy?

A doubling in housing starts off the bottom coupled with several knock-on effects from a stronger home market will give the economy a sustainable--but not explosive--boost, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. One bright spot for the U.S. economy has been the housing market, which has seen an upturn in 2012, but how much can a better housing market really help the economy. Here to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: Before we talk about some of the broader issues with the housing market and the broader economy, we did get some more pieces of housing data this week. One of them continued a positive trend and that was builder sentiment. It looked pretty good. What's your take on that?

Johnson: The number made a new recovery high at 47%, and again that means 47% [of homebuilders] thought things were getting better. That number had gotten as low as 9% or 10% at one point at the depths of the recession. That number has made a huge recovery even from a year-ago level. So, builders are definitely more confident.

Stipp: We also got housing-starts data this week, and it seemed a little soft. Can you give some context around that number? Is that something to worry about?

Johnson: We had a huge jump in the previous two months in the housing-starts data, and we got up close to 900,000 units. And now actually as some of it got revised back, so it looks like 888,000 was where we were in a peak. And now we drift back a little bit this month as kind of expected. We had a huge stair-step up and now we step back just part of the way. So, most economists had been expecting a pretty big downturn in this month's number and sure enough we got it. Now the single-family [building starts] wasn't quite as sharp as the apartment [building stars]. But again they were down and I'll acknowledge that. But on the other hand, I will say that permits were up and that means good news for the months ahead.

Stipp: So, bottom line, when you're looking at all the recent housing data, would you say that housing is still definitely in a recovery mode?

Johnson: It is still in a recovery mode. I think we made a big stair-step up in a lot of the housing economy, and we’ve maintained most of those levels for many months, including here in the fall season when we usually dip back. I keep on expecting these numbers to kind of fall apart and have to explain to people, "Well, keep in mind, it’s this time of the year and this usually happens and weather has more of an influence." I haven't had to make up any excuses.

Stipp: So, housing definitely is a bright spot for U.S. economy, but let's talk about how bright it is and kind of put it in context. How much of the economy is housing? How much could it help us out here? So housing is looking really good, but if it's a little piece of the economy, it's only going to get you so far. What's the story?

Johnson: Right at the base, housing investment--that is new houses, even including mobile homes, all your remodeling--that type of activity amounted to, at the bottom, about 2.4% of gross domestic product, and at its peak in the 2000s, we were up over 7% of GDP. And the long-term average is just a shade under 5%, and like I said, right now, we're at 2.7%. So, we could certainly see room for doubling.

And by the way, the 7% that I mentioned we saw, yes, was larger than usual in the 2000 gap. But boy, I went back and looked at the data for all of the recoveries since World War II, and we’ve almost always gotten to 6%. And then like I say, the long-term average is something a little bit under 5%, so we’ve still got a long ways to go there.

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