November 19, 2012

Steady US housing recovery is boosting economy

The latest evidence came in reports Monday that sales of previously occupied homes rose solidly in October and that builders are more confident than at any other time in 6½ years.

The Associated Press

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In this Thursday, Oct. 11, 2012, photo, Ford Smith works on a new home under construction in Chicago. Confidence among U.S. homebuilders rose in October to its highest level in six and a half years, driven by strong demand for newly built homes and growing optimism that the housing recovery will strengthen next year. (AP Photo/Nam Y. Huh)

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In a healthy economy, the number of new households typically reaches 1.2 million a year. It averaged only 570,000 a year from 2007 through 2011, according to Census data compiled by Bank of America Merrill Lynch. It reached 635,000 last year. The Census expects about 1 million new households this year.

In September, builders broke ground on new homes at a seasonally adjusted annual rate of 872,000. That was the fastest pace in more than four years. Yet it still trailed the rate of household formation. The trend suggests that home construction will have to keep rising.

Low inventory "is a sign that housing markets are tightening, and that builders will continue ramping up on new construction to fill demand," Newport said.

For all the improvement in the housing industry, sales and prices remain below normal levels. In part, that's because many potential buyers can't meet stricter lending standards or make the larger down payments that banks have required since the housing bust.

That can be a particular obstacle for first-time buyers. They accounted for 31 percent of home sales in October. That was down slightly from September and below the 40 percent common in a healthy market.

Federal Reserve Chairman Ben Bernanke said last week that banks' overly tight lending standards might be limiting home sales and holding back the economic recovery.

Still, the steady improvement in housing is benefiting the economy. Each new home built creates about three jobs for a full year and yields $90,000 in taxes, according to the homebuilders' group.

More building also creates demand for steel, glass and other materials. People who buy new homes usually buy more furniture, carpets and appliances. That typically generates more manufacturing and retail jobs.

More home construction generates more demand for pick-up trucks, as builders and contractors add trucks to handle more work. Chrysler said last week that it was adding 1,000 workers to a factory that makes Dodge Ram trucks. Ford and General Motors have also said demand for trucks is rising.

All told, Alan Levenson, chief economist at T. Rowe Price, estimates that the housing recovery could add 25,000 jobs a month next year.

Home improvement chains are benefiting. In addition to Lowe's higher earnings, Home Depot Inc. last week reported slightly higher third-quarter net income. And Home Depot raised its full-year forecast.

The clearest sign of a better housing market may be the increase in prices. A measure of U.S. prices jumped 5 percent in September compared with a year ago, according to private data provider CoreLogic. That was the largest year-over-year increase since July 2006. Other gauges have also shown solid gains in home prices over the past year.

Higher home prices can also make homeowners feel wealthier and more likely to spend more. And consumer spending accounts for about 70 percent of the U.S. economy.

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