Economic Update: Home Run

Standard & Poor's Deputy Chief Economist Beth Ann Bovino notes that Main Street seemed to ignore budget worries on Pennsylvania Avenue, with home purchases climbing higher in January. The S&P/Case-Shiller 20-city Home Price Index was up 6.8% from a year earlier in December. This is the seventh consecutive month of year-over-year price increases, and it comes after three years of year-over-year declines.

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Main Street seemed to ignore budget worries on Pennsylvania Avenue, with home purchases climbing higher in January. In January, U.S. new home sales jumped to their highest level in almost 5 years. That was even stronger than the better than expected sales reading for existing homes. And although median prices in January took back some of the gains recorded in December for both indicators, inventory of homes on the market remain lean. This should keep home prices climbing higher through 2013.

So what does the data mean?

We saw more good news from the housing sector. New home sales surged by nearly 16% to an annual rate of 437,000 units in January. That’s the strongest gain since July 2008. And while not as robust, existing home sales also edged up to 4.92 million units for the month, and a bit stronger than the 4.9 million expected by consensus. In both case, median prices in January took back some of the gains recorded in December. However, inventory of homes on the market remain lean, which we believe will provide more support to home prices in 2013.

Low inventories have helped support prices. The months’ supply of unsold existing homes is now at its lowest reading in seven year, while the supply of new homes on the market is near a 49-year low. Together with a better jobs market and extremely low interest rates, potential demand has been tapped, driving home prices higher. That further supports home prices, which was indicated in both December reports.

The S&P/Case-Shiller 20-city Home Price Index was also up 6.8% from a year earlier in December. This is the seventh consecutive year-over-year increase in prices, and it comes after three years of decline. Home prices are now down 30% from their July 2006 peak. We expect that home prices have finally stabilized.

It now seems likely that the 35% from the July 2006 peak-to-trough reading we saw in February and March may be the record low for this indicator after all. We expect prices to climb higher though next year. The overhang of unsold homes, particularly those in the process of foreclosure, will likely keep a lid on sharp gains in prices for some time, we have seen improvement.

Rising home prices have a positive knock-down effect to the overall economy. Since most people have their wealth tied up in their home, rising home prices make consumers more confident, more credit worthy and more willing to spend. In addition, potential home buyers who sat on the side-lines will want to get back in the market, on worries that if they wait too long, prices will climb higher and they’ll miss the boat. Finally, an improving housing market means more homes will be built. That means more jobs for construction workers and more business for home furnishings.