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Housing prices offer small boost

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Housing is an important “multiplier” industry. Rising home prices tend to encourage further construction, boosting many ancillary supplier industries. Higher values create a “wealth effect” among homeowners, leading to increased consumer spending and economic activity.

Since 2010, housing starts have increased and prices have risen. Perceived as an indicator of an improved economy, this helped to boost stock markets to nominal highs. However, this picture of recovery is fading. Department of Commerce figures show a recent decline in starts for single family homes. What does this indicate for the economy and stock markets?

Adjusting for inflation, the median income of U.S. households dropped 8 percent from its 2007 high of $54,489 to $50,054 in 2011. That was lower than the $50,624 median income in January 1990, some 23 years ago. Combined with increased taxes and health costs, this means that higher prices have made homeownership and even rentals less affordable for average Americans.

According to a recent Pew Research Center report, 36 percent of adults between the ages of 18 and 31 were living with their parents last year — the highest level since records began. This creates serious economic and social problems.

Zillow Real Estate Research reports that 44 percent of U.S. homeowners lack sufficient equity in their homes to allow them to qualify for further loans. Meanwhile, banks have tightened their lending criteria.

“One of the most overlooked aspects of the recovery is that for many workers, incomes are not rebounding in step with local housing markets,” said Maya Brennan, a senior research associate with the Center for Housing Policy.

So if houses are less affordable, even at current low mortgage rates, who is buying them?

The climb in house sales likely reflects the purchases of first-time buyers, investors and speculators. Furthermore, an increasing number of homes — 30 percent in June — are being paid for in cash. This indicates that most buyers are likely investors or speculators who are purchasing houses either to flip or to rent rather than to live in. Unlike bona fide homeowners, investors and speculators are more sensitive to increased prices and anticipated increases in interest rates. They are reducing their purchases to the lowest levels since September.

At the same time, foreclosure levels have fallen but are still equal to the high level of December 2008. Furthermore, 25 percent of mortgages remain underwater.

Like the rescue of Wall Street, very little of the housing recovery in many areas of the United States appears to have benefitted the majority of Americans. On the contrary, it appears to have contributed to an ever widening and politically dangerous wealth gap.

Perhaps that is why, despite the vast size of government bailouts, consumer demand and employment have remained sluggish. This poses a continuing threat to a healthy economic recovery.

Continued employment uncertainty combined with higher taxes and living costs puts the net disposable income of Americans under pressure. The lack of home buying portends sluggish real economic growth.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at

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