Across the United States, home prices are rising at an impressive rate, and increased residential construction was the biggest bright spot in an economy that contracted slightly in the final quarter of 2012. Even in Phoenix, among the hardest-hit when the last bubble burst in 2007, average home prices shot up 22 per cent last year. It was housing woes that sent the U.S. into an economic tailspin in 2008, and that market is now carrying the recovery. “A lot is riding on the continued upswing in the U.S. housing market to support a stronger U.S. economy this year and next,” says BMO Financial Group senior economist Sal Guatieri.
The housing market is so critical because as prices go up, homeowners feel richer. And that has a big ripple effect across the economy. People who buy homes—particularly new homes—spend more on furniture and appliances. Construction also creates jobs. Consumer confidence as a whole rises. It is what’s known as a “virtuous circle.” Guatieri says all these positive signs in the market should encourage banks to ease lending standards, a move that “would open the doors for many more potential homebuyers to get into the market, and would reinforce the housing market recovery.”
Any hint of a coming interest rate hike could heat up the market even more, as people rush to buy new homes while borrowing rates are still low. That would be enough to spark another U.S. housing boom. Some bloggers south of the border are even murmuring about the foundation for a new housing bubble. Such a bubble could be “born of tight supply and low interest rates,” says one post on the Economist website. The theory has no shortage of critics, who point out that it is far too soon to suggest prices have recovered enough from historic lows just last year to be talking about a bubble. “Most measures of valuation suggest that housing is very cheap across the U.S., even with prices rising significantly in some areas,” says Guatieri. “Affordability is still close to the lowest levels in at least the last four decades.” A perfect time to get in on the ground floor.