Residential Investment – Easy Trends (Q4 2012 – 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NOTE: You may be reading an outdated analysis.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.
Residential Investment Trend Analysis
Quick ‘n Easy
From the 1st quarter of 2011 to the 4th quarter of 2012, residential investment was rising by about $9.2 billion per quarter – not a great pace, but at least it’s growing. After the plunge we saw after the financial crisis in 2008, we should probably be thankful for any rising trend we can get. The fact that residential investment is considered a leading indicator makes this rising trend a very positive development.
Current Trend: Q1 2011 – Q4 2012 – During that time, there was a confirmed upward trend, with residential investment rising by about $9.2 billion per quarter. That is equivalent to about 2.4 percent of the latest figure.
Last Confirmed Trend: Q1 2008 – Q2 2009 – During that time, there was a confirmed downtrend, with residential investment falling by about $31.5 billion per quarter.
Projected Next Data Point
While there are multiple releases for each quarter’s report, for the projection I will always look to the next quarter, not just the next report. The next quarter’s residential investment report will be for Q1 2013. If the recent trend (excluding off trend data points) extends perfectly, the actual Q1 2013 residential investment will be $388.8 billion, which would represent an increase of 1.2 percent from the previous quarter. This would be slower than the trend’s current rate of about 2.4 percent per quarter, but it’s not way off.
The advance (first of three) estimate for residential investment in Q4 2012 continued a slowly rising trend that began back in Q1 2011, and it was strong enough to boost the slope of that increase from about $8.5 billion the previous quarter to $9.2 billion per quarter for the latest quarter. This was the first estimate, so we’ll have to see what the next two revised versions of the same data show. The positive sloping trend is great news for the economy because residential investment is considered to be a leading indicator. What happens there tends to happen in the general economy several months later. The emergence of housing as a positive force in the economy is often very potent, and we could really use a nice of dose of that moving forward.