National housing market recovery: housing prices soared 10.9%

National housing market recovery: housing prices rose 10.9% The New York Times reported that the comprehensive housing price index in 20 U.S. cities rose 10.9% from last year, continuing the trend at the beginning of the year...

The New York Times reported that the comprehensive housing price index in 20 U.S. cities rose 10.9% from last year, continuing the recovery momentum at the beginning of the year. A recovery in real estate, falling oil prices, and a rising stock market have all boosted consumer confidence.

Housing market picks up, consumer confidence rises Standard & Poor's Case-Shiller home price index hit a seven-year high on Tuesday, the latest sign of a recovery in the U.S. housing market. House prices rose in all 20 cities tracked, continuing a growth trend that began three months ago. Rising home prices prompted construction companies to speed up construction and hire new workers, and there was a similar surge in transactions for existing properties and new homes, as well as the issuance of building permits.

A broad recovery in the housing market appears to be boosting consumer confidence, encouraging them to spend more, offsetting concerns earlier this year that government austerity could curb consumer buying behavior.

Recent data on other aspects of the economy, such as manufacturing and exports, have also been disappointing. But a Conference Board report also released on Tuesday showed that consumer confidence hit a five-year high, and Americans' views on the current economy and future economic conditions have improved significantly. Taking into account higher taxes, consumer spending has been surprisingly resilient so far this year.

"Five years after the financial crisis began to erupt on a massive scale, and four years and a week after the recovery began, our economy is finally starting to show signs of greater recovery," said John Ryding, chief economist at RDQ Economics. "This is a long process, but don't forget what kind of situation we came from and struggled to get out of it."

The recent drop in gasoline prices may have helped, and the rise in the stock market may also have had a positive effect, although only about half of Americans own stocks. Perhaps most importantly, economists say, the rising value of existing properties means homeowners across the U.S. are finally feeling richer, and it's likely this so-called wealth effect that's allowing consumers to loosen their purse strings a bit.

Home value appreciation, rising stock market, significantly offset fiscal spending tightening

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, expects the positive impact of home appreciation and rising stock markets to offset at least one-third of the impact of fiscal spending tightening.

The Case-Shiller composite index of house prices in the 20 largest cities in the United States rose 10.9% from last year, the largest increase since April 2006. The month-on-month housing price index growth in several cities (Charlotte, North Carolina, Los Angeles, Portland, Oregon, Seattle, and Tampa, Florida) hit a new high in more than seven years.

Many factors converged to promote double-digit growth in housing prices.

One reason is that for 31 consecutive months, employers have been adding jobs, so households are willing to start spending again. At the same time, the inventory of homes on the market continues to remain at an unusually low level, as there has been almost no new construction in the past few years and a large number of homeowners have to pay more on their mortgages than their homes are worth, making them reluctant to sell at a loss.

There are now signs that higher prices are starting to prompt some would-be sellers to come forward and put their properties on the market. This is good for the health of the market and helps eliminate concerns about housing prices becoming too high again.

"The current situation is conducive to price growth, but it is also conducive to the return of housing supply to the market, so it means that the pace of price growth can be moderated," said Daniel Silver, an economist at JPMorgan Chase. He said he expected home prices to continue growing, but not necessarily at the double-digit pace seen in May.

Growth in the construction industry

The construction industry has also grown due to rising housing prices, but construction companies are still not able to put homes on the market at a pace that keeps pace with homebuyer demand.

The reduction of cheap and urgent sales has also pushed up the rise in housing prices. This phenomenon includes foreclosure sales and the practice of selling at a loss. Foreclosed homes typically sell for significantly lower prices, depressing overall reported home price levels.

Finally, during the recession, many areas experienced severe and sustained declines in home prices. The recent rise in housing prices is based on an extremely low base, so its growth momentum still appears to be very strong, although housing prices are still well below the highs of the housing market boom around 2005.

Silver said, “The areas that experienced the most severe home price declines during the financial crisis have shown the strongest growth recently.” For example, Phoenix home prices are up 22.5% compared with a year ago, while Las Vegas is up 20.6%.

It's too early for a house price bubble

Economists generally expect house prices to continue to rise, especially as economic conditions improve and more and more young people move out of their parents' homes and into their own homes. And many people believe there is no need to worry about a bubble, not only because the number of households is increasing but also because house prices remain low compared with their highs.

"It seems premature to talk about a house price bubble," said Ed Stansfield, an economist at Capital Economics. "House prices in the U.S. still look low compared to people's incomes, rents, or past home prices."

Additionally, getting a loan remains difficult. Even though the Federal Reserve has cut interest rates to rock-bottom levels, many people who want to buy a home are still finding it difficult to get a home loan.

"When we think of a bubble, we usually think of it being fueled by very easy credit, with people borrowing more than they have to pay off their mortgages and making little or no down payment," said Michael Gapen, senior U.S. economist at Barclays Capital. "That's not what credit standards are today."