Was 2012 the Year the Housing Market Recovered?
Daniel Carroll and Samuel Chapman



On many occasions during the past few years, housing market conditions have been cited as a key factor contributing to the slow recovery. For a typical household, the largest component of wealth is house value. As house prices fell and sales were depressed, household wealth shrank. The decline in house values has been indicted as leading cause of restrained consumption, as households saved from current income to recoup the loss in housing wealth. The decline in house values has also been suggested as partly responsible for stubbornly high unemployment due to “lock-in,” where a household that is underwater on its mortgage limits its job search because it cannot afford to move.

Fortunately, over this past year there have been signs of modest, yet sustained, improvement in the housing market. According to the latest report, sales of single-family units, both of new and existing, have been up year-over-year from January to November. The latest month shows new and existing sales up by 15.3 and 12.4 percent, respectively, compared to their values in November 2011. Since April 2012, monthly sales of existing multifamily units have also been positive relative to the previous year, with the November data turning in a whopping 33 percent increase.

After several years of weakness in the home construction sector, 2012 has also been marked by large increases in home starts. For single-family units, the change each month from its counterpart in 2011 has averaged 23.6 percent; for multifamily units the average is 38.0 percent.

The descent of home prices has leveled off, and prices have begun to move upward again.

During 2011, home price indexes reported negative year-over-year changes each month; however in 2012, these changes have been increasing each month. As of October, house prices were roughly 5 percent greater than the previous year. Price increases are a welcome sign as they point to a steady return of demand and suggest household conditions are improving both in terms of income and credit. The recovery also has a positive implication for general aggregate activity as it increases household net worth, thereby stimulating consumption.

Finally, while the good news discussed above is certainly encouraging, it should be noted that it is unclear at what point we should declare the housing market “fully recovered.” The data on sales, starts, and prices were all well above trend before they began to plummet in 2005. Therefore, the previous peak level is not likely the correct baseline by which to judge recovery. Nevertheless, any recovery must begin with a sustained increase in housing activity, and 2012 has, so far, appeared to deliver just that.

Category: Real Estate, Think Tank

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2 Responses to “Was 2012 the Year the Housing Market Recovered?”

  1. jswede says:

    a large part of the ~5% “recovery” in home prices are the decline of ‘distressed sales’, from nearly 30% of sales to I believe 23-24%… cut out ~20% some of the lowest priced transactions and voilà!… a 5% increase in overall prices. That’s definitely improvement, but it’s not tantamount to an unequivocal “prices are going up”.

  2. BenE says:

    I really wish you would balance your enthusiasm about high house prices with a mention they are not good for everybody.

    Sure high house prices are good for builders and those that use their house for speculation, but for people that just want a place to live in, in the long term high prices are not better than high gas prices are for drivers.

    I know the older generation seems to have a blind spot about this, but for those of us between 20-40, first time buyers or up-graders, high house prices are very much a drag on our budget. This also includes high rents for the businesses we are starting. My parents were able to buy their first house in their early twenties on a single blue collar income with a %40 down payment that took only a few years to accumulate. That seems utterly utopic among my peers.