House prices continue to fall. The Case-Shiller index slipped again in February 2012, falling to levels not seen since 2003. And that's bad news for the economy. Falling house prices tamp down consumer spending, make it harder for people to tap home equity, and increase the likelihood that borrowers may walk away from their mortgages. But as Barry Ritholtz and I discuss in the accompanying video, there's much more to housing's impact on the economy then home prices.
When a home is built or sold, it creates a great deal of economic activity that, almost by definition, takes place in the U.S. All sorts of people are called into action: the broker, the appraiser, the insurance agent, plumbers, movers, inspectors. Housing activity also generates tax revenue for cities and states. So when the volume of housing activity falls, it causes a lot of collateral damage. And when the volume of housing activity rises, it spurs growth.
Ideally, we'd have rising prices and rising volume, as we had during the boom years. But it's not so bad to have falling prices and higher volume. And there's a rising tide of evidence that suggests housing-related activity is increasing.
First, look at existing home sales. Existing home sales seem to have hit bottom in 2010. For all of 2011, existing-home sales rose 1.7 percent to 4.26 million from 4.19 million in 2010. And in each of the first three months of 2012, existing home sales were higher than they were in the corresponding month of 2011. In January they were up .7 percent, in February they were up 8.8 percent, and in March they were up 5.2 percent. The upshot: So 2010 was better than 2009 and it is sure looking that 2012 will be better than in 2011 when it comes to volume.
New home sales fell dramatically when the bubble burst, and continued their slide even after the economy began to grow. New home sales slipped from 375,000 in 2009 to 323,000 in 2010 and fell again to 306,000 in 2011. But they're up so far in 2012. In the first three months of 2012, 83,000 new homes were sold, up 16.9 percent from 71,000 in the first three months of 2011. The recovery in the volume of new home sales actually began in the second half of last year. Check out the quarterly data. In the third quarter of 2011, 76,000 new homes were sold, compared with 75,000 in third quarter of 2010; in the fourth quarter of 2011, 72,000 new homes were sold, up nine percent from the fourth quarter of 2010. That's three straight quarters of year-over-year growth.
Now let's check out housing construction. Housing starts fell off a cliff once the credit crisis hit. But they began to rise last year. In 2011, work was started on 608,800 housing units, up 3.7 percent from 2010. In the first three months of 2012, work started on 149,600 homes, a 19.2 percent increase from 125,500 in the first quarter of 2011.
Across the board, then, more houses are changing hands and rising on vacant lots, which means more work for the people who facilitate transactions, and for the people and companies who supply the goods and services needed to build homes. When it reports the quarterly Gross Domestic Product figures, the Commerce Department details how each sector of the economy added to, or subtracted from, economic growth. Look at Table 2 in the release detailing fourth-quarter 2011 GDP. For each of the last three years, residential fixed investment has detracted from the growth: by .72 percentage points in 2009, by .11 percentage points in 2010, and by .03 percentage points in 2011. But something changed last year. Since the second quarter of 2011, fixed residential investment has contributed to growth: by .09 percentage points in the second quarter, by .03 percentage points in the third quarter, and by .25 percentage points in the fourth quarter.
Yes, each of these metrics remains far below its bubble-era peak. And as Ritholtz notes, the housing sector is heavily supported by the government and continues to inflict pain on homeowners, and on the financial system. But that's all a legacy of the late housing boom. Looking forward, the crucial question to ask is whether activity is rising from its depressed levels, or whether it is simply bumping along bottom or declining. With each passing month, the flow of data indicates that activity is rising. Even as home values continue to fall, the housing sector is once again contributing to growth. Prices are likely to be the last component of the housing market to recover, not the first.
Daniel Gross is economics editor at Yahoo! Finance
Follow him on Twitter @grossdm; email him at firstname.lastname@example.org
His new book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May.