Housing Market Recovery Improves Consumer Confidence
The “American Dream” is defined by the idea that the harder you work, the greater your chance for prosperity and success—a solid education, a steady job and that home with a white picket fence. For so long, your house was not only a symbol of what you had accomplished, but also considered a safe and profitable investment because over time its value would appreciate.
That part of the American Dream was shattered five years ago when the housing bubble burst, sending home values decades backwards, and leaving homeowners wondering if they would ever dig out from the debt they owed on their house, considering its new (and much depreciated) value.
The Great Recession caused the whole economy to temporarily flat line. We are still dealing with the effects as we experience below-trend growth in both the U.S. and global economies. However, a recent surge in U.S. home prices serves as a bright spot that is powering recovery.
Data recently released by the S&P Dow Jones Indices show average home prices increased 8.6% and 9.3% for the 10- and 20-City Composites for the year ending in February 2013. All 20 cities covered by the indices, including Atlanta, Dallas, Las Vegas and Phoenix, posted year-over-year increases for at least two consecutive months.
According to the National Association of Realtors, home construction grew quarter-over-quarter at a seasonally adjusted annual rate of 12.6 percent in the first quarter of 2013, accounting for 0.31 points of the quarter’s 2.5 percent growth. Record low interest rates have helped propel the recovery in home prices, alongside a strong demand for housing—the result of less construction during The Great Recession coupled with an ever-growing population.
Housing also appears to be fairly priced. Currently, the median price of a new home in the U.S. is almost three times median income– basically at the long-term pre-bubble (1981-96) average. However, extremely low interest rates have pushed down borrowing costs to the point where mortgage and interest payments are just a little over four percent, well below historical averages.
This, plus the increase in the stock market, has not only pushed the net worth of U.S. households back to pre-recession levels, but also supports consumer consumption. According to Chief Economist Mark Zandi of Dismal Scientist, a one dollar increase in housing wealth and equity wealth increases consumption by an average of $.08 and $.03 respectively.
Before we celebrate, it’s important to note that home price appreciation will slow in the coming years unless home buyers’ incomes start to accelerate at a much healthier pace. Right now, incomes are below pre-recession levels and have posted only modest gains so far in the recovery. When the recovery does ratchet up in 2015 and beyond, housing should continue to prosper, as rising incomes balance against rising interest rates to support continued growth in construction and home price appreciation.
It is vital for the broader economy that housing the market recovery is sustained. Not only to power continued whole economic recovery, but also to offer renewed confidence to current and future homeowners… the key to unlocking the American dream.