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Real Estate Market Commentary - February 2013
by Peter L. Zachary, MAI, MRICS

The January 24, 2013 issue of the New York Times had an article “Housing Offers Hope of Strength in the Economy”. The article states: "A funny thing is happening to the United States housing market. It is getting better at an accelerating rate. And therein could lie hope for a surprisingly strong economy this year." Home prices are rising in most markets. Sales have picked up, though they are still low by historical standards.

“We had 48 months of depression in the housing industry,” said Karl E. Case, an emeritus professor of economics at Wellesley College and the co-developer of the Standard & Poor’s/Case-Shiller house price index. “Housing has brought us out of every recession in the past, and it was not available." But now, he said in an interview, “there is no question that we have turned what seemed to be a headwind into a tail wind." If that is correct, the benefits for the economy will be significant. They will not be just in the direct impact of spending on residential construction — although that is now growing at a faster rate than at any time since 1994 — or on such things as carpet and furniture. They will also show up in state and local government spending, until now one of the largest negatives during the slow recovery. Local government revenue is closely tied to property values through property taxes, and the collapse in home values led to layoffs of teachers and policemen, not to mention others, around the country.

Then there is the wealth effect. Before the collapse, the very existence of a wealth effect tied to housing was debated among some economists. In 2001, Professor Case and two colleagues, John M. Quigley of the University of California, Berkeley, and Robert J. Shiller of Yale, analyzed data from 1982 to 1999 and concluded that rising home prices increased consumer spending, but falling prices did not reduce spending significantly.

The last four years showed that last part was wrong. This week an updated version of the research, carrying it through last summer, was released by the National Bureau of Economic Research. “The extended data now show that declines in house prices stimulate large and significant decreases in household spending,” they reported. (Professor Quigley died before the paper was finished, but he is still credited as a co-author.)"

The article continues, “The National Association of Realtors, which reports each month on sales of existing, or used, homes, tries to calculate how many sales are distressed and how much that distress lowers the prices received. Lately, the proportion of distressed sales has been declining slowly and so has the discount. In December, 12 percent of sales were said to be of foreclosed homes, and an equal number were short sales, in which the home is sold for less than the amount owed on the mortgage.

At some point, the declining proportion of distress sales could well mean that house price indexes will begin to rise faster than the underlying market might really justify, as those sales stop holding down the averages."

More to come next month...

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