Home Prices Help Advance Economy’s Slow Recovery

Original Post Date: January 30, 2013

By: Conor Dougherty

The U.S. housing recovery continues to gain strength and breadth, helping to lift the economy at a time when overall growth remains sluggish.

Home prices rose 5.5% in November from a year ago, the strongest increase since the peak of the housing boom in August 2006, according to the Standard & Poor’s/Case-Shiller index, released Tuesday. A separate survey out Monday from Lender Processing Services Inc., LPS which tracks about 600 cities, showed home prices were up an average of 5.1% in November from a year ago.

The Case-Shiller report showed that 19 of the 20 metropolitan areas it tracks registered year-over-year price increases, with New York as the sole city to see prices fall. The improvement has been considerable in much of the nation: 11 cities in the Case-Shiller index saw year-over-year price gains of 7% or more.

The West, which was hit hard by the housing bust, has been a standout. Phoenix home prices were up 22.8% year over year, the best performance in the nation. In San Francisco, where home prices have been pushed up by the booming technology sector, prices increased 12.7% from November 2011.

Prices are rising after housing inventory fell precipitously over the past year. While much of this was driven by investors who buy homes in bulk and pay cash, the flurry of activity put a floor under prices and made regular consumers more confident about buying again—a development helped by low interest rates.

Many economists expect home prices to keep rising in 2013 because those two forces—low interest rates and a slender inventory of homes for sale—are expected to persist throughout the year. “We’re not building enough at a high enough rate,” said Patrick Newport, an economist at IHS Global Insight.

Price gains have transformed housing from an economic drag to a key cog in the nation’s recovery. Through the third quarter of 2012, about 1.4 million homeowners saw their mortgages go from “underwater” to above, meaning that until recently their homes were worth less than they paid for them, according to real-estate research firm CoreLogic CLGX. Meantime, Federal Reserve data show real estate wealth increased $1.0 trillion through the first three quarters of 2012.

Despite this lift, consumers’ outlooks have dimmed in 2013 as rising taxes and dysfunction in Washington have made them less optimistic. A gauge of consumer confidence tracked by the Conference Board fell 8.1 points in January, to 58.6. Consumer confidence has fallen for three months straight and is now at its lowest level since November of last year.

The pessimism was widespread: Consumers felt worse about their job and income prospects, and are adjusting some of their spending to match. The share of respondents who planned on buying a car soon fell in January. The share that expected to buy a home was flat and the share that expected to buy a big appliance such as a washing machine increased.

Confidence fell late last year, in part because of budget brinkmanship in Washington. While the federal government’s fiscal concerns have been resolved for the time being, consumers saw their paychecks shrink with the expiration of the payroll-tax holiday at the beginning of the year.

A report on the home-ownership rate, released Tuesday by the Census Bureau, showed that the percentage of Americans who owned their home fell to 65.4% at the end of last year from 65.5% in the third quarter of 2012. The rate is down from its peak of 69.2% in 2005, but the decreases have slowed over the past year as the housing market has improved.