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Last week we had the Labor Day Holiday, which allowed for few economic reports related to housing, but Bloomberg Business reported that residential investment for the second quarter of 2015 represented 3.34 percent of the Gross Domestic Product..

Compared to the long-term average reading of 4.56 percent, analysts said that the Q2 15 reading suggested pent-up demand in the housing market and hard to see the economy running out of steam anytime soon with this much upside left in residential investment. With an interest rate looming that’s good news

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Going back to the 1940’s, the U.S. central bank has never embarked upon a tightening phase with housing having so much room to run to the upside, but the forecast could help propel the economy to offset any setbacks that could occur when the Fed does raises rates.

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Rate Hike History vs GDP

This chart shows residential investment’s share of nominal gross domestic product, with the start of the previous six rate hike cycles denoted with a circle.

Residential investment accounts for 3.34 percent of nominal gross domestic product, as of Q2 2015, well below its long-run average of 4.56 percent and the Fed has not initiated a series of rate hikes at a time when residential investment’s share of gross domestic product is more than one standard deviation below its long-run average since at least 1970.

While there is plenty of upside for construction activity, the availability of workers to carry this out is more suspect, and the relative strength of the labor and housing market makes for quite an abnormal dynamic. What’s interesting about this is that the housing market is accelerating at a time when the labor market is near full employment and any shortage of construction workers could be remedied by displaced mining employees and higher wages to attract additional labor.

The unemployment rate, which dipped to 5.1 percent in August, is rapidly converging upon the Federal Reserve’s estimates for the non-accelerating inflation rate of unemployment, which is a range of 5 percent to 5.2 percent. That is, monetary policymakers think that 5 percent is the lowest the unemployment rate can get before inflationary pressures start to rise.

Labor slack has been eliminated at a rapid pace, though broader measures of the health of the job market suggest work remains to be done.

Labor Slack

The single-family housing market could enjoy a strong secular tailwind over the next 10 to 15 years as Millennials formed households and shift from renting to owning homes.

Analysts said that children born during the 1980’s will lead the next wave of first-time home buyers, with Millennials following.

Single-family housing starts, as a share of the prime age population (25 to 54 years old), remain at very subdued levels. If single-family starts normalize to 1.25 million, more than 250,000 workers would be needed to erect them, assuming that the ratio between starts and residential construction jobs reverts to what it has averaged since the start of 1985.

More lenient mortgage lending requirements and rising confidence among home builders are also cited as positive indicators for housing.

Freddie Mac reported that average fixed mortgage rates rose by one basis point to 3.90 percent for 30-year fixed rate mortgages and 3.10 percent for 15-year mortgages. The average rate for a 5/1 adjustable rate mortgage fell by two basis points to 2.91 percent. Average discount points for a 30-year fixed rate mortgage were unchanged at 0.60 percent and rose to 0.70 percent for 15-year fixed rate mortgages and to 0.50 percent for 5/1 adjustable rate mortgages.

pmms_chart (8)

Job openings rose in July to 5.75 million as compared to June’s reading of 5.32 million; this was the highest number of available jobs since records have been kept and a positive indicator for the economy and for the housing sector.

Analysts said that the high number of job openings clearly indicates that the labor force is not able to supply the workers needed by employers. Jobs available range from professional to service related work; this suggests a universal trend rather than hiring challenges within specific job areas.

Hiring activity fell in July to 4.98 million from June’s reading of 5.18 million. July separations also fell, which suggests that employers are having problems finding skilled workers and are holding on to experienced workers.

Weekly jobless claims fell to 275,000 from the prior week’s reading of 281,000 new jobless claims.

What’s Ahead for the Week?

The Fed’s Federal Open Market Committee will issue its customary statement on Wednesday; we’ll get reports that include Retail Sales, Consumer Price Index and Core CSI along with the NAHB Wells Fargo Housing Market Index, Commerce Department reports on housing starts and building permits.

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