iStock_000004828128XSmallFreddie Mac in their report, August 2013 U.S. Economic & Housing Market Outlook, explained the three reasons why housing is the key driving force to the overall economic recovery.

The Challenge

The report explains that the path to recovery has been historically slow:

The Great Recession officially ended in June 2009 and, with the release of the second quarter GDP, we now have data on four full years of economic recovery. The data release confirmed what many have felt: four years of recovery have only brought lackluster growth. Compared to all prior postwar recoveries, this expansion has been the weakest. Real GDP has risen by only 9 percent since the recession officially ended, while it grew an average of 17.4 percent in the four years following the end of the previous ten recessions.

The Answer – Housing

Freddie Mac explains that housing drives the economy in three ways. Here are excerpts from the report on each:

Demand for Housing Will Drive Employment

Increased demand for housing will help stimulate new single-family and multifamily construction and boost home sales. We expect starts to hover just below one million (SAAR) over the second half of the year, the best six-month building pace since the first half of 2008. This increased building and sales will add approximately 3/8 of a percentage point directly to GDP growth through residential fixed investment and will employ many more workers in construction and at other housing related firms.

Rising Prices = Increased Family Wealth = Increased Spending

With housing being the biggest asset of most American households, rising house prices directly affect the balance sheet of homeowners. Home equity is the largest component of net wealth for many families. As wealth rises, households generally increase their consumption spending. They may even tap into their equity through a home-equity loan, using the proceeds for either consumption or investment spending. Some evidence that home equity lending has picked up was found in Freddie Mac’s Refinance Report for the second quarter, which saw $9.5 billion in home-equity cashed-out as part of a refinance, up from a year ago.  

Small Business Development is Funded through Home Equity

Rising house prices will help the economic recovery by spurring small business formation, as a business owner’s home often serves as collateral for a start-up. Small business growth has been very weak during the recovery…Recent research by analysts at the U.S. Census Bureau and University of Maryland indicated that slow house price growth has been a key contributing factor to anemic small business growth. According to their analysis 42 percent of the decline in the performance of young firms (relative to mature firms) is due to declines in home prices.

As Freddie Mac explains, the housing recovery is crucial to the recovery of the overall economy.