Price Rise Shows a Better Balanced U.S. Housing Market

Original Post Date: November 27, 2012

By: Kathleen Madigan

The best evidence that the U.S. housing sector is recovering is the recent gains in home prices.

Tuesday brought two reports on home values. The third-quarter S&P/Case-Shiller nationwide home price index was up 3.6% from its year-ago level, its second year-over-year gain.

The Federal Housing Finance Agency uses different price methodology but came to the same basic conclusion: its third-quarter U.S. price index for purchased homes increased 4.0% from a year ago.

The uptrend in prices shows supply and demand are in better balance in both new and existing home markets. Of course, new home construction feeds more into gross domestic product but demand for both types of housing is good for consumer confidence and leads to future home-related purchases such as appliances, textiles and landscaping services.

Rising home values also filter through positively into other economic data.

Home equity remains one of the main components of household wealth, and the rise in home prices is making homeowners feel richer while also offsetting the recent decline in stock values.

(Of course, for a sustainable economic housing outlook, homeowners cannot fall into the credit trap seen during the boom: Homes are not ATMs to be tapped to finance purchases like vacations and cosmetic surgery. Luckily, more stringent bank-lending standards make that prospect less of a threat.)

Another benefit of rising prices: fewer forced sales that could retrigger an oversupply of properties on the market. Economists at IHS Global Insight cite CoreLogic data showing the recent rise in home values means about 1 million fewer homeowners are underwater with their mortgages.

News that home prices are no longer falling are also drawing out more potential buyers–as are record-low mortgage rates engineered by the Federal Reserve. The Conference Board’s November consumer survey found 6.9% of respondents plan to buy a home in the next six months. While monthly results can be volatile, the percentage has been moving up since the spring.

The latest news reinforce prospects for a virtuous economic cycle that will keep the recovery in place (absent the U.S. falling over the fiscal cliff): To the extent buyers purchase new homes, construction will lift economic activity. Better growth generates jobs making for happier consumers more willing to spend and buy homes.