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Stable Housing Market Seen as Key to US Economic Recovery


Economists agree the worst recession in decades was the result of the housing crisis. Using that logic, many believe the end of the housing crisis could also signal the start of an economic recovery.

With the housing market starting to show signs of life, can the recovery be too far behind? According to some economists, the answer to that question, is yes and no.

In yet another encouraging sign for the struggling U.S. housing market, sales of previously owned homes rose 3.6 percent in June - better than analysts expected. The report from the National Realtors Association marks the fifth straight month of higher sales and coincides with other positive trends in residential real estate.

Mark Zandi, the chief economist at Moody's Economy.com says a healthy housing market is one of the leading indicators for an economic recovery. "I think it's a necessary condition. I don't think the financial system stabilizes nor does the economy gain traction unless the housing downturn comes to an end. And I think it is coming to an end," he said.

But a rebound in sales is just part of a larger equation. Although attractive mortgage rates and tax incentives for first time homebuyers have helped kick start sales, Zandi says U.S. house prices are still falling.

That means many homeowners are making monthly payments on homes that are worth less than the value of their loans.

"And this does highlight what I consider to be the most significant threat to the economy at this point and that is the ongoing foreclosure crisis," Zandi said.

The government has launched a number of loan modification plans to allow cash-strapped homeowners to make smaller monthly payments. But unemployment, which is expected to peak next year, could complicate the recovery.

"One of the reasons why we're seeing such job losses is because businesses have really been fearful for their own survival. And of course, investors, until recently [were] very nervous, very scared," Zandi says. "It's been that loss of faith in our economy that made this a very difficult and different time. But it also highlights something that I think is important and that is: confidence is a very fickle thing. It can turn. We can go from dark pessimism to something brighter than that relatively quickly."

Zandi says consumer spending, which accounts for two-thirds of the U.S. economy, is crucial to restoring business confidence. But while the latest government reports shows spending rose nearly half a percent last month, economists say the increase was due largely to higher prices for gasoline.

The bottom line, according to experts, is that the signs necessary for recovery are starting to line up, but - not as quickly as everyone would like.

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