Housing gains boost fed's easing as rally spurs growth

, Bloomberg

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A revival in the U.S. housing market is amplifying the impact of the Federal Reserve's efforts to spur the world's largest economy.

Home values boosted by record-low mortgage rates are helping improve the finances of both households and banks. That's easing the flow of credit, providing a further boost to the housing market and the economy, say economists at Bank of America Corp. and Deutsche Bank.

"We're in the very early stages of a reinforcing cycle," said Michelle Meyer, a New York-based senior economist at Bank of America. "The Fed has been quite impactful."

Meyer predicts monthly housing starts could exceed 1 million at an annual rate by the end of 2013, compared with 894,000 in October. Residential construction may add to economic growth this year for the first time since 2005, boosting gross domestic product by 0.3 percentage point, said Deutsche Bank's Joseph LaVorgna. That contribution may double next year and reach 1 percentage point when related industries such as furnishings and remodeling are added, he said.

"The one thing missing from this economic recovery was a healthy contribution from housing, and we might finally be on the cusp of that," said LaVorgna, chief U.S. economist for Deutsche Bank in New York, who predicts GDP may grow about 2.5 percent in 2013. "Housing is going to be integral to the economy. We're assuming it continues to do some of the heavy lifting."

Securities Purchases

The Fed in September announced it would buy $40 billion a month in mortgage-backed securities in its third round of so- called quantitative easing.

The central bank's purchases of housing debt have helped drive borrowing costs to all-time lows. The average fixed rate on a 30-year mortgage was 3.32 percent last week, close to the prior's week's 3.31 percent that was the lowest on record, according to Freddie Mac.

U.S. home prices jumped 6.3 percent in October from a year earlier, the biggest increase since June 2006, according to data provider CoreLogic Inc.

Combined sales of new and existing dwellings climbed to a 5.16 million annual pace in October, up 40 percent from July 2010, which was the lowest since comparable data began in 1999. The S&P/Case-Shiller index of home prices in 20 cities climbed 3 percent in September from a year earlier, the biggest gain since July 2010.

"Monetary policy is working," said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York. "What we've seen is a very robust housing recovery this year, particularly in prices. It's kind of an accelerator for other sectors of the economy, consumption in particular."

The Standard & Poor's Supercomposite Homebuilding Index has climbed 77 percent this year, compared with a 12 percent increase for the broader S&P 500 Index. PulteGroup, up 171 percent this year, is the biggest gainer in the S&P 500.

"If we can get ourselves into a positive, virtuous circle here with rising house prices, rising construction, improving employment, I think that part of that process will be easing of mortgage-lending conditions," Fed Chairman Ben S. Bernanke said Nov. 20 in response to audience questions after a speech in New York.

The central bank's efforts "are having the desired effects" by reducing mortgage rates, San Francisco Fed President John Williams said in a Nov. 14 speech, and the housing rebound "should be a key driver of economic growth."

To be sure, housing is "far from being out of the woods," in Bernanke's words. Sales and prices are below pre-crisis levels, and about 20 percent of borrowers owe more than their homes are worth, Bernanke said in Nov. 15 speech in Atlanta. Residential investment now accounts for 2.5 percent of nominal GDP, down from a peak of 6.3 percent in 2005.

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