Housing is suddenly a bright spot for economy

Suddenly, the US housing market is a bright spot for the economy – mostly by default.

While growth prospects for much of the rest of the economy are dimming, the housing market is looking brighter. New residential construction is at its highest level in nearly four years. Home prices are rising. And sales of existing homes – which fell last month, according to a new report – are still trending higher year over year, despite weakening growth in the rest of the economy.

“The fundamentals of housing are really poised for strong growth once demand picks up,” says Celia Chen, housing economist at Moody's Analytics, an economic research subsidiary of Moody’s Corp. and based in West Chester, Pa. The housing recovery “is sustainable as long as the economy continues to add jobs.”

Housing still faces a long, hard slog. Existing home sales, for example, slowed 5.4 percent in June from an upwardly revised May figure, the National Association of Realtors (NAR) reported Thursday. But in comparison with everything else – a slowdown in job growth, weakness in manufacturing, and concerns over the European debt crisis and China’s slowdown – the housing market looks relatively strong.

Housing “is the bright spot right now,” says Patrick Newport, an economist with IHS Global Insight in Lexington, Mass.

For the first time in six years, residential housing in 2012 is expected to add to US growth rather than dragging it down, he forecasts. In the first quarter of 2012, it was responsible for more than a fifth of the nation’s growth.

With the inventory of new homes for sale at record lows, home construction is rebounding. Housing starts reached an annualized rate of 760,000 in June, the highest level since 2008. 

Housing prices have also been on a tear. In June, the median existing home price rose 7.9 percent in June from a year ago, reaching $189,400. That’s the biggest year-over-year increase since February 2006, according to the NAR. From January through April, home prices have risen at an annualized rate of 13.1 percent, the strongest performance since 2005, according to Lender Processing Services, a data and analytics firm based in Jacksonville, Fla.

These price increases probably overstate the improvement, Ms. Chen says, because of the influence of foreclosed homes among other factors. These homes typically sell at a discount. Since foreclosures represent a smaller share of June sales than the June 2011 sales, the price increase looks exaggerated. Still, other surveys suggest that home prices are firming.

And pending home sale numbers suggest that, despite June’s disappointing report, home sales will rebound in the next month or two.

“Ironically, the housing sector may be a key factor in terms of keeping the US economy from falling back into recession,” writes Brian Bethune, president of Alpha Macroeconomic Foresights LLC in Wenham, Mass.

Other economic challenges, especially the weak job market, are holding back the housing sector. Housing “is still a bright spot, but with lots of risks,” says Ms. Chen of Moody’s Analytics, “an LED light, maybe.”