by Calculated Risk on 8/16/2011 02:26:00 PM

An update by request: The following graph shows single family housing starts (through July) and the unemployment rate (inverted) through July. Note: there are many other factors impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts have moved sideways for the last two and a half years. This is one of the reasons the unemployment rate has stayed elevated.

Click on graph for larger image in graph gallery.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.

However this time, with the huge overhang of existing housing units, this key sector hasn't been participating. This is what I expected when I first posted the above graph two years ago!

The good news is residential investment should increase modestly in 2011, mostly from multi-family and home improvement, but construction job growth will remain sluggish until the excess housing supply is absorbed.