Residential Investment – Easy Trends (Q3 2014 – Advance Estimate)
Residential investment is one of the best leading indicators for the general economy, meaning that what happens to residential investment typically ends up happening to the general economy a few months later. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for residential investment and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.
NOTE: You may be reading an outdated analysis. Please visit my latest residential investment trends analysis for more info.
Quick ‘n Easy
Residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes. There is also some inclusion of equipment that come with many homes. We care about how much private residential investment is taking place because it is a great leading indicator for what will happen to the general economy several months down the line.
The Bureau of Economic Analysis (BEA), the same group that publishes the GDP for every quarter, defines “residential fixed investment” as the following:
Consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants. Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers’commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment.
In other words, residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes. There is also some inclusion of equipment that come with many homes.
Why do we care about residential investment? It just so happens to be a fantastic leading indicator, which means that whatever happens to this indicator generally happens to the general economy several months down the road. One more thing – we care most about private residential fixed investment, not so much what the government spends. That’s what shows us the real trend in the economy.
Here’s a historical chart of private residential fixed investment over the last five years provided by the Federal Reserve Bank of St. Louis:
Residential Investment Trends and Projections
Below, I will discuss whether residential investment is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I usually start my analysis from three years ago. continue reading…