Month after month, the news from the housing market has been better than expected. Sales are up and so are prices.
But does an improving housing market tell us anything about the overall economy? Economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa., thinks it might.
When housing starts showed a surprising 12 percent gain in December, Naroff saw signs it was helping to improve the labor market. New claims for unemployment benefits dropped in the aftermath.
Housing traditionally has helped an economy rebound from a recession. But that didn't happen this last time. The housing market was so damaged that the normal lift housing produced just didn't happen. But maybe that's changing.
Points to stronger consumer spending
“Housing is one of the indicators that are pointing to stronger consumer spending,” Naroff said. “I use it as a consumer number not just a construction report as households have to be willing to take on the debt and they do so only if they are confident. Housing sales rose sharply during the second half of the year and that is consistent with solid 3%-3.5% annualized increase in retail sales and strongly rising vehicle sales, it is clear that the consumer is making a comeback and leading the economy forward.”
Here's more evidence. A massive economic slowdown that most had been predicting for the last quarter of 2012 didn't materialize. Retail sales in that period were better than expected. At the same time, residential construction picked up. A coincidence? Probably not.
Here's another housing stat that could have deep meaning for the economy. A report by CoreLogic showed that approximately 100,000 more borrowers reached a state of positive equity during the third quarter of 2012, adding to the more than 1.3 million borrowers that moved into positive equity through the second quarter of 2012.
That means fewer “underwater” borrowers, who owe more on their mortgages than their houses are worth. Theoretically, that means they are closer to being able to refinance their mortgages to today's near historic low rates. By doing so they can lower their monthly payments, freeing more money to spend on other things and thus, stimulating the economy.
Moving in the right direction
Together, negative equity and near-negative equity mortgages accounted for 26.8 percent of all residential properties with a mortgage in the third quarter of 2012, down from 27 percent at the end of the second quarter in 2012. Nationally, negative equity decreased from $689 billion at the end of the second quarter in 2012 to $658 billion at the end of the third quarter, a decrease of $31 billion.
This decrease was driven in large part by an improvement in house price levels. This dollar amount represents the total value of all homes currently underwater nationally.
"Through the third quarter, the number of underwater borrowers declined significantly," said Mark Fleming, chief economist for CoreLogic. "The substantive gain in house prices made in 2012, partly due to tight inventory caused by negative equity's lock-out effect, has paradoxically alleviated some of the pain."
Even in spite of the end-of-year fiscal cliff drama, the economy – and the housing market – appear to have held up well. Naroff sees that continuing into 2013, putting the economy on a track for marked improvement.
“Business spending, hiring and confidence will all jump,” Naroff predicted. “That sets us up for a better spring and a potentially strong second half of this year, even in the face of tax increases and spending cuts.”