November 30th, 2012 3:12 PM by Steve Iltis
Real Estate, Once a Drag on Growth, Reverses Course as Other Sectors Tail Off
By CONOR DOUGHERTY, NICK TIMIRAOS and NEIL SHAH
The U.S. housing market, which plunged the economy into recession five years ago and was a persistent drag on the recovery, is now a key economic driver at a time when other sectors are slowing.
An improving housing market is buoying consumers' spirits and giving the economy its biggest lift since the real-estate boom. Macroeconomic Advisers projects the economy will grow at a 1.4% annual rate in the fourth quarter, with housing contributing 0.4 percentage point. IHS Global Insight is projecting a 1% growth rate, with housing contributing 0.53 of a percentage point—the largest contribution since 2005.
"Housing seems unfazed by the uncertainty that is plaguing other parts of the economy," said Ben Herzon, an economist with Macroeconomic Advisers.
The real-estate recovery is just beginning, of course, and housing's role in the overall economy remains diminished by five years of rising foreclosures and falling prices. New loans aren't easy to come by as lenders grapple with distressed mortgages. Millions of homeowners owe more than their property is worth. Still, housing's steady improvement is "going to offset some of the slowdown in manufacturing, and it is one of the reasons we think we're likely not to see a double-dip recession," said Doug Duncan, chief economist at Fannie Mae .
The housing turnaround has been a boon for real-estate brokers and home builders, some of whom have seen their stock prices more than double this year. Retailers have seen a new stream of customers ready to decorate, furnish and upgrade their homes while investors are spending at hardware stores to renovate previously foreclosed homes. Banks, meantime, have posted record mortgage profits amid high refinance volumes and stronger demand for new loans.Beyond those direct benefits are a number of indirect effects. Rising home values make homeowners feel better about their finances—making them more likely to spend and, with interest rates low, more comfortable about taking on debt. An index of confidence released Tuesday by the Conference Board rose to 73.7 in November, the highest level since February 2008.
"Housing's share belies its importance to the economy," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank . "The confidence effects are massive."
Rising home prices are making consumers feel flush, which may eventually spur them to spend more: New home-equity lines of credit are projected to grow by 22% this year to $77 billion, a three-year high, according to Moody's Analytics. "We can start to see the housing market as an assist to our growth rather than an anchor," said Frank Blake, chief executive of retailer Home Depot Inc. on an earnings call this month.
While rising prices now are driving the housing market forward, that couldn't have happened without a painful cycle of losses. Lower prices and rock-bottom interest rates have boosted affordability. The average monthly mortgage payment on a median-price home in October, assuming a 10% down payment, fell to $720 at prevailing rates, down from nearly $1,270 at the end of 2005.
Rising rents and an uptick in household formation have ignited demand, which, in turn, has pushed inventories of homes for sale to their lowest level in at least a decade. The upshot: More buyers are chasing fewer homes, pushing up prices.
Write to Conor Dougherty at firstname.lastname@example.org, Nick Timiraos email@example.com, and Neil Shah at firstname.lastname@example.org
The Wall Street Journal