A revival in the U.S. housing market is amplifying the impact of the Federal Reserve’s efforts to spur the world’s largest economy.
Home values boosted by record-low mortgage rates are helping improve the finances of both households and banks. That’s easing the flow of credit, providing a further boost to the housing market and the economy, say economists at Bank of America Corp. and Deutsche Bank AG.
“We’re in the very early stages of a reinforcing cycle,” said Michelle Meyer, a New York-based senior economist at Bank of America, the second-biggest U.S. lender by assets. “The Fed has been quite impactful.”
Meyer predicts monthly housing starts could exceed 1 million at an annual rate by the end of 2013, compared with 894,000 in October. Residential construction may add to economic growth this year for the first time since 2005, boosting gross domestic product by 0.3 percentage point, said Deutsche Bank’s Joseph LaVorgna. That contribution may double next year and reach 1 percentage point when related industries such as furnishings and remodeling are added, he said.
“The one thing missing from this economic recovery was a healthy contribution from housing, and we might finally be on the cusp of that,” said LaVorgna, chief U.S. economist for Deutsche Bank in New York, who predicts GDP may grow about 2.5 percent in 2013. “Housing is going to be integral to the economy. We’re assuming it continues to do some of the heavy lifting.”
The Fed in September announced it would buy $40 billion a month in mortgage-backed securities in its third round of so- called quantitative easing.
The central bank’s purchases of housing debt have helped drive borrowing costs to all-time lows. The average fixed rate on a 30-year mortgage was 3.32 percent last week, close to the prior’s week’s 3.31 percent that was the lowest on record, according to Freddie Mac.
U.S. home prices jumped 6.3 percent in October from a year earlier, the biggest increase since June 2006, data provider CoreLogic Inc. said today.
Combined sales of new and existing dwellings climbed to a 5.16 million annual pace in October, up 40 percent from July 2010, which was the lowest since comparable data began in 1999. The S&P/Case-Shiller index (S15HOME) of home prices in 20 cities climbed 3 percent in September from a year earlier, the biggest gain since July 2010.
“Monetary policy is working,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas SA in New York. “What we’ve seen is a very robust housing recovery this year, particularly in prices. It’s kind of an accelerator for other sectors of the economy, consumption in particular.”
Stronger demand is boosting sales at builders such as Toll Brothers Inc. (TOL:US), the largest U.S. luxury-home builder, which today said revenue jumped 48 percent to $632.8 million in the three months ended Oct. 31, while net contracts signed surged 75 percent.
The Standard & Poor’s Supercomposite Homebuilding Index, which includes Toll Brothers and PulteGroup Inc. among its 11 members, has climbed 77 percent this year, compared with a 12 percent increase for the broader S&P 500 (SPX) Index. PulteGroup, up 171 percent this year, is the biggest gainer in the S&P 500.
The benchmark gauge of U.S. equities slumped 0.2 percent to 1,407.05 at the 4 p.m. close of trading in New York after President Barack Obama held his ground about raising tax rates for the highest-income Americans. The yield on the 10-year Treasury note retreated 0.02 percentage point to 1.60 percent.
“If we can get ourselves into a positive, virtuous circle here with rising house prices, rising construction, improving employment, I think that part of that process will be easing of mortgage-lending conditions,” Fed Chairman Ben S. Bernanke said Nov. 20 in response to audience questions after a speech in New York.
The central bank’s efforts “are having the desired effects” by reducing mortgage rates, San Francisco Fed President John Williams said in a Nov. 14 speech, and the housing rebound “should be a key driver of economic growth.”
To be sure, housing is “far from being out of the woods,” in Bernanke’s words. Sales and prices are below pre-crisis levels, and about 20 percent of borrowers owe more than their homes are worth, Bernanke said in Nov. 15 speech in Atlanta. Residential investment now accounts for 2.5 percent of nominal GDP, down from a peak of 6.3 percent in 2005.
Builders sold fewer new homes than forecast in October and purchases were revised down for the prior month, showing the industry still faces hurdles such as an unemployment rate that’s stuck around 8 percent three years into the economic recovery.
Williams last month said the central bank will probably start buying $45 billion a month of Treasuries next year in addition to the current $40 billion of debt purchases. The policy-setting Federal Open Market Committee meets Dec. 11-12.
“The unemployment rate remains unacceptably high,” New York Fed President William C. Dudley said in a speech yesterday.
Still, for those with jobs, low interest rates are a boon. Among them are Danny and Pat Yorkovich, who decided to buy a bigger house after 18 years in their current residence. They signed a contract on a new, three-bedroom ranch-style home in Charlotte, North Carolina, in November.
“The interest rates were good,” said Danny Yorkovich, 44, who works as an office manager. “We didn’t owe anything on the home we had, and had been saving up and waiting for the right time to purchase.”
New-home sales ripple through the economy as buyers spend an average of $8,000 on household items, including furniture, appliances and landscaping, according to David Crowe, chief economist for the Washington-based National Association of Home Builders.
That’s benefiting companies like Atlanta-based Home Depot Inc. (HD:US), the largest U.S. home-improvement retailer, and Lowe’s Cos., the second-biggest, which both reported higher third- quarter profit as sales rose. Shares of Home Depot have climbed 53 percent this year, while Mooresville, North Carolina-based Lowe’s is up 40 percent.
Even those who aren’t moving are spending more on furnishing and remodeling, according to Robert Niblock, chief executive officer of Lowe’s.
“The bottoming of home values gives that homeowner psychological permission to spend on their homes again,” Niblock said in a Nov. 19 telephone interview.
Household finances are improving, putting consumer demand on a stronger footing. Americans have cut debt by $1.37 trillion from the peak in 2008, according to Federal Reserve Bank of New York data. Household indebtedness shrank by $74 billion to $11.31 trillion during the third quarter.
Lending tied to real estate is reviving. After six years of declines, home equity lines of credit will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to Moody’s Corp.
The Fed’s record easing policy is “a very big part” of why banks are becoming more inclined to make home loans, Bernanke said Nov. 20.
The benefits of lower borrowing costs and the housing industry’s improvement are starting to accrue for both the broader economy and the Fed’s monetary policy, according to Guy Berger, a Stamford, Connecticut-based U.S. economist at RBS Securities Inc., one of the 21 primary dealers authorized to trade directly with the Fed.
“Housing is gumming up the economy and financial markets less than it was,” Berger said. “The housing market’s improvement does give a little bit more bang to the buck.”
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