Daniel Gross

Housing Continues Its Steady Rise

Contrary Indicator

For the past few months, we've been noticing the ways in which housing — for so long a drag on economic growth — has become a relative bright spot.

Five years after the bust, foreclosures are stilling clogging up the system and house prices are far below their peaks. It could take a decade or more for housing values to return to their pre-bust peaks.

But if you look below the surface, it's clear that housing activity has been on the rise in the past year. And when activity rises, housing can become a meaningful contributor to overall economic growth, even if prices generally stagnate. And that's what has been happening, as housing starts and existing and new home sales have been rising steadily from their low, low bases.

An Add to GDP

According to the Commerce Department, residential investment has added to GDP for the past four quarters: by .09 in the second quarter of 2011, by .03 in the third quarter of 2011, by .25 in the fourth quarter of 2011 and by .4 in the first quarter of 2012.

Last month, the Census Bureau reported that new home sales came in at an annual rate of 343,000 in April. That's up 3.3 percent from March, and up 9.9 percent from April 2011. Through the first four months of 2012, 117,000 new homes have been sold, up 14.7 percent from the first four months of 2011.

On Tuesday, Census reported that new housing starts in May, while down from April, were up 28.5 percent from May 2011. Through the first five months of 2012, ground was broken on 289,800 new housing units, up from 228,600 in the first five months of 2012 — an increase of 26.8 percent.

This morning, the National Association of Realtors reported on existing home sales for May. While the pace of sales declined from April to May, both the number of sales and the price of homes rose significantly from a year ago. The median price paid for an existing home in May 2012 was $182,600, up from $173,700 in April 2012, and up from $169,300 in May 2011.

A Double Benefit

Now, when both prices and volume rise in tandem, that creates a double economic benefit. Check out the more detailed existing home sales data to see what I mean. In May 2012, 444,000 homes were sold in the U.S. at an average price of $231,500. The economic activity generated by these sales: $102.8 billion. By contrast, in April 2012 400,000 homes were sold at average price of $221,700, for a total of $88.68 billion. In May 2011, 391,000 homes were sold at an average price of $217,600. That's $85 billion. In other words, home sales generated $17.8 billion more in value in May 2012 than they did in May 2011 — an increase of 21 percent.

But even these data don't give us the full picture. One of the great things about home sales is that they spur a lot of collateral economic activity, some of which is tied solely to the volume of transactions, and some of which is tied to price. So the amount spent on title insurance, often calculated as a percentage of the value of the transaction, rises with both volume and price. So do the commissions received by real estate agents and mortgage brokers. Transfer and conveyance taxes are often levied as a percentage of the home sale, so cities benefit as well.

Many other professions and trades find that their compensation is tied solely to volume — the mover, the appraiser, the inspector, the delivery service that ships documents, the attorney. A home transaction calls a host of service providers into action. That's one of the reasons the housing boom was so beneficial to macroeconomic growth during the boom and one of the reasons it was so detrimental to growth during the bust.

For the past several years, we've been able to blame housing for America's macroeconomic woes — and with good reason. The continuing flow of data that highlights a trend of rising activity, and now rising prices, suggests that housing's days of being a scapegoat may be coming to an end.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

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