The U.S. housing sector is poised to boost economic growth. While existing home sales fell 5.4 percent in June from May, other indicators suggest a recovery is under way. A flip to a positive impact after dragging on GDP for five years will give lawmakers a chance to change distorting housing market policies.
Despite the short-term decline, existing home sales last month ran 4.5 percent faster than in June last year. More encouraging, the median sale price increased 7.9 percent year-on-year. Home buyers and their lenders should gradually regain confidence that their investments will be sound.
Home construction activity seems to be running ahead of the housing market itself, as permits and starts in June were both up around 20 percent on the previous year. However the National Association of Homebuilders’ confidence index, while sharply higher in June than May, is still well below housing boom levels, so optimism is still appropriately contained.
The housing slump sliced more than one percentage point off real GDP growth in 2007 and 2008. But the sector’s impact turned positive in the last quarter of 2011 and residential investment added 0.42 percentage point to annualized growth in the first quarter this year. If the year-on-year growth in housing starts is a reasonable proxy for the increase in residential investment since the second quarter last year, then a rough calculation suggests housing could contribute as much as 1.5 percentage points to annualized second-quarter GDP growth. That could mean the economy expanded more than many economists expect. Continuing housing growth should also make a sizeable dent in unemployment.
President Barack Obama’s re-election campaign may draw comfort from this trend. But the policy implications should also be clear. Housing policy – not just bad bank lending – helped inflate the bubble which, upon bursting, triggered the recent financial crisis.
A variety of recent initiatives to support the market will need to be wound down. Government guarantees for home loans through finance giants Fannie Mae and Freddie Mac and other channels need a comprehensive rethink. So does the tax subsidy on mortgage interest. Major changes need perhaps a decade to be phased in. With a recovery taking hold, early 2013 looks like the right time to start putting plans in place.