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Why rising home prices are good for the US economy

Mark TrumbullThe Christian Science Monitor

Home prices in the US rose in September, confirming that low interest rates and declining foreclosures are helping to propel a broad recovery in the housing market.

The price gains spanned from hard-hit cities like Miami to places such as Denver, which never saw a big boom-and-bust cycle.

Progress is visible in two newly released sets of numbers. The Standard & Poor's Case-Shiller index showed nationwide price gains averaging 3.6 percent in the third quarter of 2012, compared with the same quarter a year earlier.

The S&P Case-Shiller report also included numbers for 20 major cities. Only two show price declines for the year. Those were New York (down 2.3 percent) and Chicago (down 1.5 percent).

In a separate report on Tuesday, the Federal Housing Finance Agency’s (FHFA) issued its own estimate of price changes, saying US home prices have risen 4 percent over the past year, using the same gauge of comparing third-quarter figures for 2012 and 2011.

Both reports are watched closely by economists.

"Higher home prices are making a difference" for the housing market and the wider economy, Patrick Newport, a housing analyst at IHS Global Insight, wrote in an analysis of the numbers. "Higher prices are ... boosting home sales by nudging fence sitters, who up to now have been waiting for home prices to bottom out before jumping into the market."

Mr. Newport and other analysts cite several other ripple effects:

• The price gains have lifted more than 1 million homeowners "above water" during this year, so their homes are worth more than their mortgage debt, according to analysis by CoreLogic. This reduces the risk of foreclosure. Although delinquency and foreclosure rates remain high (as of June, 10.8 million borrowers had negative equity in their homes), the problems are in decline.

• The shift has improved overall household finances. As homeowning households feel rising net worth – or at least less fear of having an under-water mortgage – consumer confidence and spending get a boost. On Tuesday, a Conference Board survey of consumer confidence showed a rise in November to its highest level since February 2008.

• Homebuilders have reasons to boost construction, as they see rising prices and a declining inventory of homes for sale. After a recession-induced hiatus, any increase in homebuilding adds to overall economic growth.

• The reduction in under-water mortgages makes it easier for people to move as they search for better jobs.

Of course, the flip side of rising prices is that potential buyers may see homes become less affordable. The good news for buyers, however, is that as banks see stronger pricing, they'll be more willing to extend credit. Low interest rates are good only if you can get a loan, and the Federal Reserve has expressed concern that credit conditions may be too tight in many cities.

Moreover, home prices in most cities that went through a boom-and-bust cycle are still well below their pre-recession peaks. Today's average prices are down 31 percent from five years ago in Los Angeles, and down 25 percent in Chicago, according to FHFA numbers, for example.

The price gains this year have encompassed much of the nation.

In some cases, the pattern might be called stabilization after big troubles. In Elkhart, Ind., a poster child of recession thanks to layoffs in recreational-vehicle manufacturing, shows prices up 1 percent over the past year. Ditto for Detroit.

And there are some housing markets that once were high-flying, then saw prices fall at least 30 percent, and are now rising: Boise, Idaho; Bend, Ore.; Stockton, Calif.; Cape Coral, Fla.

Some cities are only beginning to get their footing again. Higher-than-average foreclosure rates may explain why New York and Chicago saw prices falling in the S&P Case-Shiller report.

Some 6.8 percent of mortgages are in foreclosure in Illinois, and the number in New York State is 6.5 percent, according to IHS Global Insight, which cites Mortgage Bankers Association data. The national foreclosure rate is 4.1 percent.

The overall pace of foreclosures is still high compared with historical norms. But the inventory of homes headed to foreclosure has declined by about 16 percent over the past year, and the problem of loan delinquency has declined about 7 percent, according to the firm Lender Processing Services.

Where the housing market heads next remains uncertain. Winter is generally a slow season for real estate sales. But on a seasonally adjusted basis, the market could keep improving as long as the economy does.

A wild card is the "fiscal cliff" negotiations in Washington. If a deal is reached that avoids major tax hikes, that could help the economic recovery continue. But if lawmakers fail to reach a deal, that could be tougher.

It's possible, moreover, that a fiscal bargain could include closing "loopholes" in the tax code – including paring back on the deduction for mortgage interest. If this happens, many economists expect it would be done in a way that largely preserves the tax break for people of moderate incomes, while ratcheting it down for higher-income taxpayers.

If that occurs, the change could tamp down prices of high-end homes.