Housing recovery boosts US economy

America’s housing recovery is gaining momentum, according to the latest data, and it is bolstering other parts of the economy too. US house prices were up by 3.6% year-on-year in September, according to the Case-Shiller index. Another index, by CoreLogic, puts prices up 5% in the year to September, the highest figure since 2006. Housing starts have reached a four-year high. Meanwhile, consumer confidence has jumped to a four-year peak in November and record numbers of Americans visited shops and shopping websites over the four-day Thanksgiving weekend.

What the commentators said

There is now “clear evidence of a durable housing recovery”, said Stan Humphries of Zillow. The gradually improving economy and job market; record low mortgage interest rates; rising rents and an uptick in household formation are driving demand. Supplies are falling. At the current pace of sales, it would take just 5.4 months to clear the inventory on the market. A supply of six months is usually associated with a balanced market. “We built too many homes during the good years,” said Patrick Newport of IHS Global Insight. Now, “we have finally gotten rid of that excess”.

Nonetheless, analysts point out that we can’t expect house prices to shoot upwards. Credit remains tight, and many households are still in negative equity, crimping demand. However, the more prices rise, the more people will have enough equity to remortgage, boosting demand and prices.

Housing is key to growth because “the confidence effects are massive”, as Joseph LaVorgna of Deutsche Bank put it. Consumers, who account for 70% of the economy, feel wealthier and are more inclined to spend. They can also free up cash by borrowing against the rising value of their house. The upshot is that economic growth may be faster than expected in the final quarter, said Christopher S Rugaber on Lubbockonline.com. But then, of course, there’s the fiscal cliff to worry about.