PORT WASHINGTON, N.Y. (MarketWatch) — As the U.S. economy rounds the Labor Day turn, it appears that, after several false starts, the long-depressed housing market is finally climbing out of the basement.
It is nothing more mysterious than supply and demand. For the first time in a number of years, the supply of both new and used homes available for sale has dropped below demand.
No matter what the product or service, whenever demand exceeds supply, rising prices are sure to follow. Housing is no exception. Prices are rising both quarter-to-quarter and year-over-year for the first time in two years.
This turnaround in prices is apparently convincing would-be homebuyers that it does not pay to delay — especially since mortgage interest rates are at 60-year lows, and homes are the most affordable they have been in at least a quarter of a century.
As a result, buyers have begun to deal. Home sales are up more than 20% from a year ago, while pending sales are now at a 2-1/2-year high. This should kick home prices even higher, and thus spur even more buying.
In a market such as the one housing has just been through, rising prices are a good thing.
First of all, they will help those homeowners who are underwater — that is, those who owe more on their mortgage than their house would fetch were they to try to sell it.
Second, higher home prices make homeowners feel wealthier. When this happens, people are more willing to spend. As you can imagine, this gives a lift to a whole bunch of industries that depend on consumer spending.
Rising prices also encourage fence-sitters to bid on the house of their choice. Finally, seeing this action, potential sellers may well be tempted to put their homes on the market, thus making it more liquid and permitting easier comparisons with other homes.
As inventories of new homes begin to dwindle, construction will perk up. Already, builder confidence in August rose more than expected and now sits at a five-year high.
Naturally, this means more jobs for those in the construction trades, with the resulting ripple effect on materials and supplies.
And as people move into these homes, there is more demand for furniture, home appliances and motor vehicles, as well as other consumer goods and services.
This sequence of events has been part and parcel of every business-cycle recovery in the postwar period, and this one will be no exception — when it kicks in. For you see, politics is affecting the housing market, too.
Since there is a great deal of uncertainty over taxes and regulations post-Dec. 31, buyers, sellers and builders will want to be certain that mortgage interest and property taxes remain deductible so they can accurately determine affordability and thus how much to bid or ask.
Because of the elections and partisan politics, the fate of these items will not be known until well into next year — if then. Obviously, it all depends on who is elected president, which party controls Congress and how willing they are to work together.
Chalk up another speed bump that lies in the path of this fragile recovery.
Irwin Kellner is MarketWatch’s chief economist.
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