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THE LUMBER MARKET: An Analysis of Housing’s Soft Rebound

The skewed distribution of income and lingering effect from the great recession are taking a toll on housing demand.


U.S. home construction continues to massively underperform relative to underlying demand, despite the fact that the economy is now more than five years into a recovery. The most commonly cited economic statistics suggest that housing demand should be much stronger. The unemployment rate has declined to 6.1%; the 30-year mortgage rate is barely above 4%; and real GDP growth has expanded by 11.3% from its recessionary low and stands 6.6% above its pre-recession peak.

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The headline stats look good but they do not tell a complete story. To begin with, the unemployment rate has declined sharply, due in large part to a substantial decline in the labor force participation rate. The jobless rate would stand at more than 10% if the labor force participation rate matched its 2007 average.

Just as the low jobless rate does not necessarily imply that the employment situation is healthy, low interest rates alone do not mean that credit conditions are favorable. In fact, much more restrictive lending standards have blunted the impact of lower mortgage rates on the housing demand.

Less attention has been paid to the misleading nature of real GDP and income statistics. The unhappy fact is that the skewed distribution of income has severed the link between rising national income and stronger housing demand.

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Depending upon how one looks at the data, average household real income has either risen by 3.7% from its precession peak or it has declined by 6.4% over that same period. The first figure captures the change in the mean real household income. To calculate this, we started with nominal aggregate personal income and divided by the consumer price index to give us a real personal income. Then we divided real personal income by the number of U.S. households. This gives us the mean real household income.

If most of the change in income over the last several years went to the top few percent of households, then the mean figure would give a distorted view of the economic health of the typical U.S. household. This is exactly what has happened.

That is why it is important to look at the median income as well. The median income is the level of income at which 50% of U.S. households earn more and 50% earn less. Median income figures, while valuable, have been very difficult to come by at a high frequency. Typically these numbers are released at an annual frequency (at best) and with a long lag.

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Fortunately, a firm named Sentier Research has started publishing reliable monthly figures that are based on government numbers.

The gap between the mean and median real household income has widened significantly. Moreover, the median U.S. household (by income) now earns 5.7% less than it did in January 2000 on an inflation-adjusted basis.

It is not just the median household that has taken it on the chin with regard to income growth (or lack thereof). Upper-middle class households have also seen their incomes stagnate. According to the Fed’s recently released Survey on Consumer Finances (which is released every three years), real incomes contracted for every income segment except for the top 90% to 100%.

Moreover, the SCF shows that the lion’s share of all income increases between 2010 and 2023 went to those in the top 3% of the income distribution.

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