HOUSING STARTS AND EMPLOYMENT

Is there a relationship or link between new jobs and housing starts? Economic reasoning would logically lead you to answer positively- the greater number of people who get a job, the more likely some of them would purchase a new home. Of course this is all contingent on other factors such as the availability of vacant housing, ability to get a mortgage, and a growing population, to name a few. That is, any direct link between new jobs and new housing is constrained by demographic and other factors.

However, the search for a way of predicting the course of new housing starts led some economists, a few years ago, to posit a fixed or constant relationship between new jobs and housing starts. They sought and came up with a constant value that could be used as a rule of thumb to calculate how many new houses we should expect given the growth in employment. Today I examine whether such a constant does in fact exist or can be calculated meaningfully. I do this analysis at two levels; first at the national level looking at aggregate data that we normally see on a day to day, and then using the less commonly seen metropolitan area. Does such a relationship hold?

U.S. New Jobs and Housing Starts
At the national level we find that the ratio of new jobs to starts hovers somewhere between zero and three, ignoring those periods when employment falls in negative territory. A simple mathematical average using data from 1960 on, a calculation that one can always do with numbers even if the result is totally meaningless, shows the ratio for the U.S. equal to 1.1. Taking this number as a rule would mean that a new job translates into a slightly more than a new housing start. Applying this ratio to the number of new jobs between 2010 and 2014 results in over eight million housing starts driven by the new jobs created. But in fact, over this five year period, there were 3.9 million new houses started, and not eight million as the ratio suggests.

In reality, as a visual inspection of the graph to the right clearly shows, there is no stable ratio value. The blue line is the annual ratio of new jobs to housing starts going back to 1960. The red line reflects the 1.1 average over all those years (I excluded the years since 2008.) The way the blue line fluctuates around the average red line shows that the average does not carry much predictive power. In many years it underestimates the ratio and, conversely for others the ratio is overestimated; the size of the discrepancy is of an order of magnitude of more than two. One can only conclude that if indeed employment growth leads to new housing construction, we can't say with any degree of confidence how large or small the impact will be; that is, how many housing starts we should expect from employment growth alone.

Is there a ratio for MSAs?
We find that the relationship new jobs to starts is even more tenuous at the local level. We examined data for the ten largest metropolitan areas in the U.S. based upon the number of housing permits; we are using housing permits instead of starts, since the latter are not readily available for metropolitan areas.

A review of these data, graphed on the right, shows that there is not a consistent pattern for these metropolitan areas. In fact, the opposite seems to be true, there is great variation both within and between metro areas. Following any single line, for instance looking at the top line that is Los Angeles, we can see that the ratio ranges from 5 to 11- a huge difference. Also looking at the values for a given year, say 2011, we can see large differences between metro areas. The ratio can range from a low of around 3 for Atlanta to nearly 10 for New York. Thus there is not an accurate rule of thumb that we can use given there is not a stable value that can be used for any of these metro areas.

All of this simply shows that suggesting a specific number of housing starts given the growth in new jobs is close to economic nonsense. It is correct to say that more jobs will likely lead to more housing starts, the same that it will lead to more automobile sales or any other consumer product. People work because they want to buy stuff. However to say that X number of new jobs will produce exactlyY housing starts is a totally false statement.