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This housing pickup won't drive much economic growth

October 1, 2012: 11:40 AM ET

Bright spots in the housing market are certainly a welcome relief, but it's going to take something dramatic to impact GDP.

FORTUNE – The U.S. housing industry has shown signs of a turnaround lately, but what kind of progress will it take to help the economy grow faster?

The short answer is that "housing would have to be on steroids," according to a report by Capital Economics released Friday.

The London-based firm has highlighted some interesting statistics that put what has been widely considered a "housing recovery" into context. Since the start of the year, the number of homes on which construction has started rose by 30%. This has been helped by record-low mortgage rates, which are expected to fall lower with the Federal Reserve's latest promise to buy billions of dollars worth of bonds until the economy looks better.

MORE: 3 positive housing indicators offset by 3 worries

The fact that builders are building more homes is a good sign, but they're still far from building what's needed to drive the economy. During the three months ending in June, residential investment made up only 2.4% of the economy – well below the peak of 6.3% during the end of 2005, when the housing industry was still booming.

So even if residential investment might have risen, it has only added a mere 0.2 percentage points annually to GDP growth during the past five quarters. Bottom line is that housing won't likely drive economic growth.

This should come as little surprise, given that the U.S. Commerce Department reported on Thursday that the economy over the spring grew less than it previously thought. Actually, growth almost stalled. During the second quarter, GDP rose 1.3%, revised down from the 1.7% rate the government reported in August.

Indeed, the housing recovery will be a long and bumpy road.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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