Can the US housing market save the US economy?

19th July 2012

The figure that has got markets excited is ‘housing starts' – this is the number of privately-owned houses starting to be built in any given time period: "Housing starts rose 6.9 per cent last month to an annual rate of 760,000 units, the highest level since October 2008, according to the US commerce department.

"The June data were more than analysts' expectations of 711,000 groundbreakings, while May's estimate was revised upwards to 711,000. New home construction was up 23.6 per cent year on year."

Even the recently gloomy Ben Bernanke, US Federal Reserve chairman, was cautiously optimistic: "One area where we have seen modest signs of improvement is housing."

This piece gives a picture of the US housing market as a whole. While it is not exciting and remains well below its peak, it certainly suggests that it is showing signs of life: 

"Prices in half the 20 cities in the Standard & Poor's/Case-Shiller home price index have risen over the past 12 months. Even with the gains, the index remains 34 percent below its peak reached in the summer of 2006, at the height of the housing boom. Based on the 20-city index, home prices are now at about the same level as in early 2003."

Many commentators, including Ben Bernanke have cited the US housing market as the key to unlocking global recovery: 

"Bernanke says the broader economy won't fully recover until the depressed housing market turns around. People are spending less because they are stuck in "underwater" homes, which are worth less than what is owed on the mortgage. And home values are falling because of foreclosures and tight credit – even in areas with lower unemployment.

"Recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year. That reduction corresponds to lower living standards for many Americans," Bernanke said.

Robert Reich, professor of public policy at the University of California, was also vocal about the impact of the declining housing market in the US. "The biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping, and prices are still falling – despite already being down by a third from their 2006 peak. January's average sale price was $154,700, down from $162,210 in December."

Therefore it seems clear that – whatever else is going on in the US economy – a recovery in the housing market will remove one important impediment to growth. However, there are still those who simply don't believe these figures. The general source of gloom about the UK housing market – House Price Crash – is equally gloomy about the prospects for the US market.

Most believe that the market is ‘fake', manipulated by US policymakers. General Congreve said: "For the last couple of years my cousin was working for a high-end property agent. He told me the banks are sitting on tonnes of repossessed property and drip-feeding it into the market. The strategy of restricting supply obviously isn't working that well for the banks because my cousin recently lost his job due to not making any sales." 

The banks are undoubtedly offloading parts of their property portfolio and that process is not at an end, so there may be some germ of logic in the ‘rigged market' idea. However, if the housing market is rising in spite of these problems, it is difficult to suggest that the market is ‘rigged'.

Overall, the news is encouraging. The improvement in the housing market removes one considerable stumbling block to an overall recovery in consumer confidence. Coupled with improving jobs data, the consumer economy may start to show signs of life once again. It is not exciting, but it is better than the alternative. 


More on Mindful Money:

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Bernanke warns of Congress inaction over ‘fiscal cliff'

America's Holy Grail: Achieving energy self-sufficiency

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