Good News on Housing

October 5, 2012

The housing market is coming back.

 

S&P’s Case-Shiller home price index of 20 major metropolitan real estate markets for July is out today, and the good news is both broad and deep. Prices were up 5.9% for the first seven months of the year, their largest year-to-date gain in seven years, and significantly better than increases in 2011 (0.4%) and 2010 (2.1%). Prices rose in 16 of 20 markets compared with a year ago, and while they’re still 30% off their 2006 peak, it’s important to remember how inflated those 2006 prices were.

 

Even better is the depth of the improvement, as prices increased even in the cheapest homes. The gap between price gains in the high end of the market and the low end has narrowed, and the bulk of the gains come from the bottom and middle tiers. Even though four of the 20 Case-Shiller markets aren’t showing the gains, and Atlanta in particular is lagging, the trend is undeniably positive. Reinforcing it are data that show single-family housing starts well ahead of last year’s pace, existing home sales are up, the inventory of homes for sale is down, and foreclosure activity is slowing.

 

Rising home prices increase the net worth of home owners. And, as a result, the improved balance sheet has a psychological impact, causing people to feel better about their situation, and this reduces frugality. If their home price increase allows them to refinance at lower rates, the impact is multiplied.

 

There’s more. The Conference Board recently reported that its consumer confidence index rose in September to its highest level since February. Remember that consumer purchasing drives 70% of the American economy and it dovetails nicely with renewed optimism; the number was well above August’s level and also well above economists’ expectations.

 

Are we finally seeing the beginnings of a self-sustaining recovery, where the trends reinforce one another and a pattern of economic growth becomes clear? It’s still too early to tell, but it’s not too early to be cautiously optimistic. Growth won’t be a straight line up and there are other important economic factors to deal with, like job growth, but it is encouraging to finally see progress in home prices.

 

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