Housing Recovery Gains Momentum, But Are We in for a Bumpy Ride?

While the housing market showed signs of improvement last year, economists are now confident that a recovery is underway. Housing currently adds 13 percent to the nation's economic growth, but is this a good thing?
February 1, 2013, 8am PST | Jessica Hsu
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With two-thirds of the nation’s 300-plus housing markets in recovery mode, economists are feeling confident about the prospects for the continued recovery of the housing market and the overall economy. While 1.4 million single-family housing starts is considered "normal" by the National Association of Home Builders (NAHB), chief economist David Crowe expects that this number will rise from 535,000 last year to 650,000 this year to 844,000 in 2014. However, "if the new-home sector were to expand any faster," Crowe cautions, "builders would run into supply and labor shortages that would drive prices too high, too fast."

Last year, national home prices increased at a 6 percent annual rate. "The current recovery," said Crowe, "is now broad enough and of sufficient enough size to affect the national figures." The appreciation can be attributed at least partly to the media's optimistic coverage, which made people feel more comfortable about the recovery and increased demand. Frank Nothaft, chief economist at Freddie Mac, agreed that "[d]emand has been the missing stimulus" and that rising home values this year will "push buyers forward before house prices and mortgage rates move any higher." The 25-34 age group's jump in household formations has also helped the market, though primarily in apartment construction.

Meanwhile, at Strong TownsCharles Marohn isn't buying the hype. He believes we're in for a bumpy ride over the long-term as America reckons with the fallout from its six decade "suburban experiment." 

"With an economy based primarily on propping up the housing market, we've become powerless to solve the underlying unemployment problem," he explains. "The private sector can simply no longer borrow and build our way to anything that feels like prosperity, real or not. A fundamental shift needs to take place in how we generate wealth and prosperity, but we're stuck. We need housing to go up to solve the unemployment problem, but another housing bubble does not an economy make."

"This is going to be painful, but I don't see any way forward except for a local strategy of building strong towns."

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Published on Friday, January 25, 2013 in Urban Land Institute
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