US home prices rose by 0.2% in February, marking the first increase in 8 months. Year-on-year home prices increased by 2%, the slowest annual gain since July 2012. Meanwhile, sales of new homes in March rose more than expected, jumping by 9.6% to the highest level in a year as homebuyers pounced on recent drops (however small) in prices and mortgage rates. Home construction projects have risen about 6% over the past two months after falling 26% in the preceding nine. And the S&P CoreLogic Case-Shiller index of prices of 20 US cities in February was nearly 5% below last year’s peak.
The evidence might appear contradictory, but a bottoming process does seem underway.
Why is US housing important?
Real estate and the housing market play a critical role in the US economy. At the individual level, roughly 65% of houses are owner-occupied, homes are usually a substantial source of household wealth, and housing construction provides widespread employment. Housing accounts for a significant portion of all economic activity, and changes in the housing market have broader effects on the economy.
Purchasing a home is often the largest investment individuals make. Home ownership accounts for a significant portion of net worth: as of the third quarter of 2022, owner-occupied real estate accounted for a quarter of households’ net worth.
Residential construction is also a significant industry, employing large numbers of people – probably close to a million workers. Housing obviously contributes to GDP, and in 2021 investment in housing was $1.1 trillion, or 4.8% of GDP. Housing services (rent, utilities, etc) add another $2.8 trillion, or 11.9% of GDP. In total, the housing sector accounts for 16.7% of US GDP.
Housing plays an important role in the broader economy as well. Rising home prices encourage additional construction spending to take advantage of higher prices, leading to more robust economic growth. Rises in house prices have broader effects on the economy through wealth effects. An increase in house value encourages homeowners to spend more than they do at other times because of greater confidence in the economy, provides increased home equity for homeowners to borrow against, and furnishes higher rental income.
And what about Australia?
Many of these trends are also becoming evident in Australia. A year-long slide in Australian home prices is showing signs of bottoming out far earlier than anyone thought possible, greatly lessening the risk of a jump in distressed sales and raising hopes for a soft landing in the economy.
Defying predictions of a crash, prices in Australia’s eight capital cities have actually risen 0.8% so far in March, according to CoreLogic. The peak to trough decline in these cities of about 10% has only partially unwound the almost 26% surge during the pandemic.
This will be the first monthly gain since values peaked in April last year before the RBA embarked on its tightening campaign. The rebound has been most pronounced in Sydney where prices were up 1.4% month-on-month in March. That leaves them down 13% from their peak, relatively modest compared to the eye-popping surge of almost 30% during the COVID pandemic.
The tentative turnaround has been a surprise to economists who had expected the slide to last all year given mortgage rates have just hit decade highs after 10 straight rate hikes.
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