Wednesday, April 28, 2010

Good News from the Housing Sector

Copyright, The New York Times Company

Recent reports on housing starts, new home sales and housing prices show that the housing recovery continues.

The housing crash is the single most important factor that started this recession, so it would be nice to know when it will end.

Although the housing inventory exceeded the demand in 2007 and 2008, we have known for a while that the fundamental supply and demand ingredients would permit a genuine housing recovery to begin in 2009. As demand caught up, housing prices stopped falling and stabilized at more normal levels.

Although housing prices should not be expected to return to their 2005 peak any time soon, housing sector data released last week suggest that housing prices can head somewhat higher. Housing permits and housing starts have continued higher in the last couple of months. New home sales were higher in March than they had been for a while.

Although the Case-Shiller home price index for January and February was slightly lower than it was at the end of 2009, the message was somewhat different from a government report last week on the producer price index for single-unit residential construction through March 2010. That index measures the average change over time in the cost of materials for making new homes. The chart below displays the index for each month since January 2008. The index has increased 3 percent since last summer, when it was 5 percent off its high.

The producer price index is of economic interest because it is an important determinant of the prices of existing homes. Few people want to pay more for an existing house than they would pay for having one built new. As a result, the housing producer price index is an important ingredient for economic forecasts of housing prices.

Inflation hawks may say that the housing producer price index is a harbinger of economywide inflation to come. It’s quite possible that inflation-adjusted housing prices will not significantly increase, but even a housing price increase resulted merely from general inflation, would be welcome, because anything that raises housing prices can help alleviate the extraordinary prevalence of foreclosures that derives largely from the fact that debt-strapped homeowners can no longer sell their homes for enough to cover their mortgage.

That’s one reason why it was good news last week that the costs and amounts of housing construction continue to rise.

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