The Great Housing Rebound of 2012: How the Fed Helped Sellers Beat the Odds

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Sam Hodgson / Bloomberg / Getty Images

Construction crews work at the site of the Arista at the Crosby development in Rancho Santa Fe, Calif., on Dec. 21, 2012

Without a doubt, the U.S. housing market has been the most successful sector of the economy this year, and Wednesday’s Case-Shiller home-price index report — which showed a fifth consecutive month of year-over-year increases in home prices nationwide — was a late Christmas present for homeowners across the country.

The housing-market “bottom” was one of the biggest business stories of 2012. After years of falling home values, the data clearly showed that the bleeding stopped somewhere in the first part of 2012 and that home prices have actually begun to slowly rise since then. In addition, other indicators like housing starts, new home sales and foreclosure statistics all point toward a healing housing sector.

These dynamics have gotten some economists and market analysts excited about the growth prospects for the U.S. economy in 2013. Robert Johnson, director of economic analysis for Morningstar, called housing “the big change factor in 2013″ and believes that “direct housing investment will be a meaningful contributor” to economic growth in 2013. He also sees industries related to housing — like furniture manufacturing and sales — adding to economic growth in 2013 as the housing market begins to pick up.

(MORE: Why Are Real Estate Listing Sites Hot Right Now?)

There’s no doubt that we’re finally seeing the beginnings of what economists call a positive feedback loop when it comes to housing. Rising home prices allow lenders to be more generous with home financing, which allows even more prospective home buyers to access the market, further driving up home prices. And higher home values give consumers and builders more confidence to go out and spend money or make investments, which also stimulates the real estate market and broader economy.

But with all this enthusiasm for the housing-market recovery, it’s important to take a step back and think about the real driving force behind rising home prices. Jonathan Miller, president and CEO of the real estate appraisal and consulting firm Miller Samuel Inc., astutely asks the question of how home prices can rise in an environment in which unemployment remains high, there is little growth in take-home pay, taxes seem poised to rise and lending standards continue to be tight.

One of the answers to this riddle, according to Miller, is the Federal Reserve. Record low mortgage rates, primarily (though not exclusively) due to the Fed’s decision to buy up mortgage-backed securities, have done much to boost home prices. Last month I wrote about an analysis done by Tim Iacono of Iacono Research that illustrated just how significant Fed stimulus efforts can be when it comes to home prices. He showed that today’s superlow rates can enable a home buyer to purchase a house that is 50% more expensive than she would have been able to afford under the average mortgage rates over the past 20 years.

(MORE: Is Freddie Mac Betting Against the American Homeowner?)

In addition, there is reason to be concerned that distressed home sales — like foreclosures or short sales — will hamper the housing recovery in 2013. Miller notes that distressed home sales began to increase yet again in the second quarter of 2012, as banks started to ramp up their foreclosure mechanisms after the resolution of the robo-signing scandal earlier this year. Homes sold under these conditions are usually done so at a steep discount, and large amounts of distressed properties on the market will drive down home prices more generally.

This is not to say that the recent trend of rising home prices isn’t a good thing. It’s very difficult to imagine a significant economic recovery in an environment of falling real estate prices, as a house is most Americans’ single most significant asset. But any sober analysis of the recovery must admit that Federal Reserve stimulus is probably the single most important factor driving rising home prices. And until we see a significant drop in unemployment, or a significant increase in wages, we won’t get a housing-market recovery that can sustain itself without unprecedented intervention from the central bank.

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12 comments
JoeKidd
JoeKidd

Does anyone writing for TIME realize that Geithner and Bernanke admitted that one reason they keep enacting Quantitative Easing was to make house prices go higher so that people 'think" their houses are appreciating? And so now, house prices are increasing, just like the two mentioned hoped, and these newspapers/online blogs keep coming out and proclaiming the housing market is getting better.


Good grief.

FredFlintsone
FredFlintsone

The foreclosure moratorium began a year ago  is coming to an end. Banks will resume releasing millions of distressed properties driving prices downward in "our great housing recovery ". Realtytrac.com does not see a bottom in home prices yet.

DavidWeeks
DavidWeeks

This country has been building "recoveries" on paper for a couple of decades now.  And it shows.  Mortgage crisis, internet bubble, Wall Street Crisis, then the housing crisis.  How about we start producing some domestic energy and start manufacturing again. They say Americans will no longer do factory jobs.  I'll bet they would if all the welfare was taken away. And our deficet and trade balance would improve too.

antonmarq
antonmarq

Where? California's click estates? New York City High rises? Where? Another bunch of crap. There must be tens of thousands of foreclosed homes that are sitting around waiting for buyers that the BANKS refuse to offer credit to.  Having one millionaire buy 50 or 100 foreclosed homes, to later rent them out, IS NOT A HOUSING BOOOOOOOMMMM.

LindaHoskins
LindaHoskins

Yeah, there is a housing rebound. Like the new houses going up 1/4 mile from me while three beautiful 20 yr old homes sit for sale over 2 years on my street. This is a bogus "recovery" fueled by the government to make money for those in the know. What about the families trying to sell an existing home? In our city there are lots of nice homes for sale, some 2-3 years on the market, but no one is buying, except in the new additions.

It seems that our recovery is very selective, the Fed decides who gets growth and targets money there. Everywhere else it is stagnant. We are looking more like the old Soviet Union and its central planned economy.

PropertyDog
PropertyDog


Well I wonder if the so called recovery is only an appearance because of the glut of properties the banks are hanging onto causing there to be more demand than supply. So it seems it may just be an artificial propping up of the housing market. I hope this article is correct but with all the issues going on in the world it’s very un-nerving to think how very much we as a world are all so interdependent. Problems in the world economy could spiral our economy back into a prolonged recession or even a depression. I hope I'm wrong and that by some miracle everybody in the world will come together to help each other up and on with global prosperity like the world has never known. It would be great if all people would put some faith in the good there is and build on it rather than focus on all of the negative and by so doing bringing more of the muck and mire negative into our lives that we as a world seem to be stuck in. Pray for our world, pray for our country. Faith is the opposite of fear which so many seem to want to propagate under the guise of being realistic. What is that anyway REALISTIC.. Thank God the Write Bros weren’t realistic when they built a plane. Thank God Edison wasn’t realistic when he invented the light bulb. Thank God the guy who invented polio vaccination wasn’t realistic when he discovered  the vaccine. Point being it’s not how things look that is the reality but how we believe they can be that becomes the reality. Now faith is the ASSURANCE of things hoped for and the EVIDENCE of things not seen. Lets rock a little faith and guaranteed we come out of this funk we’ve been in for years now.. I know it’s what I want.. How about you?

PatrickCampe
PatrickCampe

Makes sense. Lots of folks want this too and need to keep the faith. It can be difficult as we know but anything worth while is difficult. The faith of a mustard seed can move mountains and all we need right now are  a few more million mustard seeds. 

bjr
bjr

Certainly a reason for optimism on the housing front, but consider the recent National Association of Realtors statement which indicates that 20% of all single family home sales in October were to investors, not owner occupants.  Who really benefits from the current lending climate?

snow
snow

Yet another person trying to sell us that the house market is in recovery.  And that is a good thing (it ISN'T).  When the market starts recovering, it will again snowball into a bubble and the same thing will happen again.  When will we learn that you need to allow the market to adjust by itself, instead of the banks propping it up by withholding Foreclosures and the Feds keeping rates too low.  High rates/low prices are better in a buyers market.  Buy low, refinance when rates are down again.  Hello?

bwdelaney
bwdelaney

We call this whistling past the graveyard.  There is no housing recovery that can sustain itself, due to demographics.  The baby boomer generation is retiring at the rate of 10,000 people per day.  The homes they live in will flood the market and continue to drive prices down.  Keep an eye out for Time's article about the big "surprise" when home prices begin to fall again. 

DavidGibbons
DavidGibbons

Totally! In fact, the mortgage savings that the average American family can enjoy through these historically low rates offsets about 150% of the increased tax burden if the US does go off the so-called fiscal cliff. The fed's strategy of buying up MBS's has been nothing short of brilliant and should be far bigger news than the fiscal cliff.