From the NYT:
The United States has had 11 recessions since the end of World War II. All but two were preceded by a big decline in the housing market.
Inside that bit of trivia lie some fundamental insights into housing’s outsize role in the business cycle, along with clues to suggest that the economy is on firmer footing than the increasingly pessimistic forecasts make it seem. The gist is this: The United States may or may not enter a recession this year, but if it does, housing is unlikely to be the cause, because it never really recovered in the first place.
“Housing is not in a position to lead this thing down,” said Edward Leamer, an economics professor at the University of California, Los Angeles.
How much it can help prolong the overall recovery is another matter. Home sales and prices have been sluggish in the face of rising interest rates. Still, the pace of construction, combined with pent-up demand from young adults, suggests that the sector should at least remain stable in the face of uncertainty elsewhere.
Even though housing does not account for all that much of the economy, its role in recessions is huge, because it is highly cyclical and sensitive to interest rates. Think of expansions and recessions as the cycle of things that go up and down a lot. Housing is a big determinant of where that cycle is headed because, unlike many other sectors, it has wide swings.
Sometimes downturns have other causes, but they only underscore housing’s role in economic cycles. The 1953 recession followed a decline in government spending after the Korean War, and the 2001 recession was driven by a decline in business spending after the dot-com bubble popped. Both were relatively brief and shallow — the 2001 recession was the least severe since World War II — in part because housing investment remained stable.
The most recent recession, from 2007 to 2009, offered one of the more exaggerated examples of housing’s guiding role in downturns. A recent report from the Federal Reserve Bank of St. Louis found that the construction sector accounted for a little over a third of the decline in output in the past recession, and about half of the job losses (a figure that includes laid-off construction workers and job losses in connected industries).
How does housing look now? Mixed, but mixed in such a way that the things most important to economic growth are the most stable.
In other words: Housing is in recession already. It might not get better soon, but it probably won’t get worse.