By all accounts, the news coming from the Case-Shiller home price index is good news; an average increase of 10.9% is nothing to scoff about (http://bit.ly/6Ivqgq). Granted, this is an average--areas like San Francisco experienced explosive growth, up 22.2% which led to some skewing of the numbers, but it's irrefutable that the signs all point to steady growth in the housing market. This isn't just good news for the housing market as historically a robust housing market has led to broader economic recovery, not vice versa.
In each of our three previous recessions (1980, 1991 and 2001), economic recovery was prefaced by significant growth in residential housing, growing at an average rate of 30% in the initial years of recovery.
But why is this sector so important?
When home construction is at its historic norm, additional jobs are created. The housing industry accounts for about one-fifth of the jobs when construction is at normal levels. Each new house creates three new jobs and roughly $90,000 in tax revenue.
Consumer spending will not return until market prices rise. High-debt households spend 15% less than low-debt households. Homeowners that are underwater on their mortgages will spend less on maintenance, renovations and other home-related goods.
Roughly twenty-five percent of small business owners start or collateralize their businesses with home equity. Depressed market prices since the mortgage crisis have eliminated excess equity in many cases and slowed the creation and/or growth of small businesses.
Foreclosure is expensive to investors, borrowers and local communities. Some estimate that the cost of recent foreclosures has topped nearly $2 trillion in investor and borrower losses not to mention the long-term effects on wealth in America. Additionally, vacant homes can decrease the value of occupied homes in the neighborhood and can lead to increased crime. Vacancies and lower market prices also effect property tax values that fuel state and local government revenues leading to fewer jobs and less spending on local infrastructure.
Does the housing market improvement mean we should throw our hats in the air and rejoice, claiming full economic recovery has arrived? Far from it. Should this still be viewed as a sign of progress and potential future growth? Definitely. Growth is happening, steadily, and the housing market movements are an excellent litmus test for determining what’s left to come.