The U.S. housing market, the industry whose crash started the greatest recession since the Depression, is now on the mend and just might be the key to revival for the rest of the economy this year, according to several economists.
Home prices in the largest 20 U.S. cities rose 5.5 percent during the year ended in November 2012, basedon the S&P/Case-Shiller index, the largest increase in over six years and a major relief to slightly underwater homeowners. That gain has pulled many of them out of negative equity, freeing them up to sell if needed. In fact, last year the number of underwater homeowners – those whose homes are worth less than the value of their mortgages – shrank by to 7 million, down from 11 million in 2011, according to JPMorgan Chase.
Prices are rising because of limited inventory in the lower and mid-price ranges. The number of foreclosures on the market has dropped dramatically in the past year and a lack of new building from the past several years has created a shortage of supply. With increased prices, building starts are rising, creating new jobs in many sectors.
“It’s not just the guys that are putting the roof on the house,” said St. Louis Federal Reserve President James Bullard in an interview as quoted in a Bloomberg article. “It’s the transportation associated with it, it’s the Realtor business, the lending business, all kinds of other businesses. He added,”The psychology has shifted. Good things are happening.”
Banks could possibly start lending more this year as well. With fewer foreclosures on their books, more of their reserves are freed up for mortgage investments. In fact, Michael Feroli, chief U.S. economist at JPMorgan Chase believes that increased lending will help boost GDP by 0.4 percent this year.
And as homeowners see their equity continue to rise this year, they will likely turn that “house-rich” feeling into spending. Karl Case and Robert Shiller of the Case-Shiller index estimate that homeowners will pump an extra $80 billion into the economy this year as their property values grow.
So while the exact amount of GDP growth is unpredictable, with such a rosy housing outlook, the overall economy will definitely benefit from the improvements.