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Bouncing Back: The Recovering Housing Market

The collapse of the U.S. housing market helped drive the economy into the worst recession since the Great Depression. Unlike previous recessions, however, the housing sector lagged as the broader economy began to grow, holding back what might have been a stronger recovery.

That may be changing. Residential fixed investment — a measure of private home purchases — has contributed to the growth of gross domestic product (GDP) for seven consecutive fiscal quarters, and U.S. median home prices rose by 10% in 2012, the largest annual gain since 2005.2–3 Although price gains varied widely across the country, 133 out of 152 metropolitan areas had gains while only 19 experienced losses.4
Residential investment and rising home prices alone do not always translate directly to broader economic growth. However, they could have far-reaching effects throughout the U.S. economy, not only for homeowners but also for consumers, businesses, and investors.
Supply and Demand
Although it may seem counterintuitive, the recent jump in housing prices is due in part to the issues that caused prices to fall in the first place. Large mortgage debt, reduced property values, and high unemployment pushed many homeowners “under water,” making it more difficult for them to sell their homes and shrinking the available inventory.5 As the economy has recovered, the combination of job creation and pent-up demand has pushed prices upward.6
In a sign that more buyers are returning to the market, mortgage applications rose by 1.8% in January 2013 over the previous month, the highest increase in 18 months. If this trend continues, it could bode well for a sustained recovery.7

New Homes, New Jobs
Driven by rising prices and lower inventory, new home starts grew 28% in 2012 and reached the highest level since 2008. Remodeling has also increased, in part because homeowners are more confident in the value of their homes.8
The construction industry added 28,000 jobs in January 2013 — about 18% of total job creation for the month and the fourth straight month of strong construction job growth. This is good news, but builders report that it has been challenging to find skilled construction workers to handle surging demand because many of them left the industry during the downturn.9
Corporate Gains
According to Morningstar, the top-performing industries in 2012 were housing-related: homebuilders, the lumber industry, and home-improvement stores, with annual stock returns of 77%, 74%, and 55%, respectively (through early December). Some analysts believe that these gains represent an initial “snap back” from the housing collapse and that there may be more room for growth in these industries if the housing market continues to recover.10
Keep in mind that stocks are subject to market fluctuation, risk, and loss of principal. Shares, when sold, may be worth more or less than their original cost.
Consumer Spending
Rising home values increase the total value of consumer assets, which tends to stimulate spending — a relationship called the wealth effect.11Considering that consumer spending accounts for about 70% of GDP, an increase in spending could have a broad economic impact.12
The retail industry may receive an additional boost from the transaction effect, the correlation between consumers moving and then spending on home furnishings — ranging from carpets and couches to pots and pans.13
Cautious Optimism
Although many signs point to a housing recovery, challenges remain. Bank repossessions and foreclosure activity declined in 2012, but the inventory of foreclosed properties rose, reflecting the slow pace of the foreclosure process. This could suppress prices until the inventory of homes in foreclosure is reduced.14
Despite increased buyer interest and low mortgage rates, strict lending standards could make it difficult for many would-be buyers to obtain financing. And even though the Federal Reserve intends to keep interest rates low for the foreseeable future, the Fed’s actions have not always translated directly to mortgages, and it’s not clear how the housing market may react if mortgage rates rise.15
Additionally, many homeowners still have high mortgage debt and low equity, even with rising prices. This could result in their holding back on spending — or moving — until values return to pre-recession levels.16
For now, the wisest outlook may be cautious optimism. If 2012 represents a turnaround, 2013 could reveal whether the housing recovery is sustainable and might continue to help power the U.S. economy.
1, 5, 16) WSJ.com, July 27, 2012
2, 12) U.S. Bureau of Economic Analysis, 2013
3–4, 6) WSJ.com, February 11, 2013
7) CNNMoney, February 8, 2013
8, 15) WSJ.com, January 27, 2013
9) CNNMoney, February 1, 2013
10) CNNMoney, February 14, 2013
11, 13) Forbes.com, February 5, 2013
14) Associated Press, January 17, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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