High & Low Finance: Signs of a Housing Recovery Point to a Stronger Economy

A funny thing is happening to the United States housing market. It is getting better at an accelerating rate.

And therein could lie hope for a surprisingly strong economy this year.

It has been a long time, as the economy worked off the excesses of the boom and cleared out the inventory of homes that should never have been built or were “sold” to people who could not hope to afford the payments. But now the inventory of houses for sale — both new and used — is as low as it has been in decades. Home prices are rising in most markets. Sales have picked up, though they are still low by historical standards.

“We had 48 months of depression in the housing industry,” said Karl E. Case, an emeritus professor of economics at Wellesley College and the co-developer of the Standard Poor’s/Case-Shiller house price index. “Housing has brought us out of every recession in the past, and it was not available.”

But now, he said in an interview, “there is no question that we have turned what seemed to be a headwind into a tail wind.”

If that is correct, the benefits for the economy will be significant. They will not be just in the direct impact of spending on residential construction — although that is now growing at a faster rate than at any time since 1994 — or on such things as carpet and furniture. They will also show up in state and local government spending, which has until now been one of the largest negatives during the slow recovery. Local government revenue is closely tied to property values through property taxes, and the collapse in home values led to layoffs of teachers and policemen, not to mention others, around the country.

And then there is the wealth effect.

Before the collapse, the very existence of a wealth effect tied to housing was a debating point among some economists. In 2001, Professor Case and two colleagues, John M. Quigley of the University of California, Berkeley and Robert J. Shiller of Yale, analyzed the data from 1982 to 1999 and concluded that rising home prices increased consumer spending, but falling prices did not reduce spending significantly.

The last four years showed that last part was wrong. This week an updated version of the research, carrying it through last summer, was released by the National Bureau of Economic Research. “The extended data now show that declines in house prices stimulate large and significant decreases in household spending,” they reported. (Professor Quigley died before the paper was finished, but he is still credited as a co-author.)

They concluded that the decrease in spending caused by a house price decline was greater than the increase in spending produced by an increase in house prices, but that might not turn out to be the case if we have a prolonged gain in prices. There may be a significant amount of pent-up demand for housing — not from people without it but from people who would like to move and would have done so already had the economy been better. Some of those people, perhaps chained to their old homes because the homes are not worth as much as is owed on the mortgages, might view breaking even on the old house as a sign that it is time to sell.

The National Association of Realtors, which reports each month on sales of existing, or used, homes, tries to calculate how many sales are distressed and how much that distress lowers the prices received. Lately, the proportion of distressed sales has been declining slowly and so has the discount. In December, 12 percent of sales were said to be of foreclosed homes, and an equal number were short sales, in which the home is sold for less than the amount owed on the mortgage.

There is reason to hope that those figures will continue to decline. Moody’s reports that the “shadow inventory” of homes with foreclosures pending and homes already owned by banks but not on the market — is declining. It voices hope that banks “are finally putting behind them the operational and regulatory issues that plagued them in the past and are taking the steps necessary to address their backlogged foreclosure inventory.”

At some point, the declining proportion of distress sales could well mean that house price indexes will begin to rise faster than the underlying market might really justify, as those sales stop holding down the averages.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/01/25/business/signs-of-a-housing-recovery-point-to-a-stronger-economy.html?partner=rss&emc=rss