Rising Home Prices Brighten Economic Outlook

Posted on September 28, 2012

They’re back! Home prices, that is.

Two reports out Tuesday confirm an uptrend in home prices. The S&P/Case-Shiller home price index of 20 major cities increased 1.2% in the 12 months ended in July, beating expectations. Later in the day, the Federal Housing Finance Agencyreported its measure of U.S. home prices increased 0.2% in July over June. That rise capped off seventh consecutive monthly gains.

To be sure, real estate values aren’t soaring as they did during the housing boom, and the level of prices remains about 30% below their 2006 highs, according to S&P data. But you have to crawl before you can walk.

The news has to bring joy in the hallways of theFederal Reserve. That’s because rising home prices bring a hat trick of benefits to the economic outlook.

First and most obviously, rising prices indicate the housing market is in better balance. The supply of homes has shrunk considerably since the worst of the housing recession, while low rates and somewhat better job markets have lured in more buyers. A relatively low level of inventory coupled with rising demand will support greater homebuilding in the future, a plus for real gross domestic product.

Second, better values mean fewer homeowners remain underwater on their mortgages. Positive equity makes defaults less likely. That’s a plus for banks’ balance sheets.

Lastly, consumers feel more confident and wealthier if their homes aren’t losing value like a sieve leaking water.

Better news on real estate could explain why surveys of consumer confidence posted better-than-expected readings in September–even as other data for this month, such as factory surveys and weekly jobless claims, remain weak.

Happier, richer consumers are more willing to spend–a trend sure to hearten central bankers.

Economists at Deutsche Bank call homeowners’ equity “the biggest driver of household buying power.” By their calculations, home equity grew by $827 billion in the four quarters ended in the second quarter of 2012, the largest year-over-year increase since 2005.

Coupled with positive household cashflow and better credit conditions, rising home equity should support real consumer spending at about a 2% pace–as long as gasoline prices don’t spike, the DB economists forecast.

“While hardly robust,” they write, “[the pace] will be enough to assure further modest expansion in overall real GDP growth and help minimize recession risk.”

Kathleen Madigan, The Wall Street Journal