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The Role of Housing in Recession Cycles

Housing plays a substantial role in the U.S. economy. One method of measuring the impact of housing in the economy is to calculate the total amount of capital exchanged in home construction, remodeling, and fees associated with the buying and selling process. Together, this sum is known as the residential fixed investment (RFI). The RFI has averaged 4.8% of the U.S. gross domestic product (GDP) since recordkeeping began in 1947. If you add household-related investments, furnishings and rents to the RFI, the contribution of housing to GDP has averaged about 21% since 1947.

Housing is considered a leading indicator of economic cycles. The housing market will slow in advance of a recession, indicating an economic contraction. Conversely, the housing market tends to expand before the end of a recession. RFI often turns positive one-to-two quarters prior to the end of a recession. In six out of the last nine recessions since 1947, RFI turned positive during or before the final quarter of the contraction.