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Tuesday, August 07, 2012

The economic impact of a slight increase in house prices

by Calculated Risk on 8/07/2012 08:13:00 PM

If I’m correct about house prices bottoming earlier this year – and the CoreLogic report released this morning is another indicator that prices might be increasing a little - a key question is: What will be the economic impact of slightly increasing house prices?

We saw the impact on Freddie Mac this morning. Freddie reported net income of $3 billion compared to a $2.4 billion loss in Q2 2011. Freddie noted that the decline in its loss provision was due to “improvements in the number of newly impaired loans and to lower estimated future losses due to the positive impact of an increase in national home prices.”

Also I expect CoreLogic and Zillow to report a meaningful decline in the number of homeowners with negative equity in Q2. We might see something like 1 million households that regained a positive equity position at the end of Q2 2012. These are borrowers who might find it easier to refinance, or sell if needed.

We will probably also see a meaningful decline in the number of newer mortgage delinquencies. Note: The MBA Q2 National Delinquency Survey results will be released this Thursday.

Another impact that we've discussed before is the impact on listed “For sale” inventory. Seller psychology is very different if prices are perceived to be falling, as opposed to if prices are stabilizing or even increasing. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. That behavior pushes up inventory. But if potential sellers think prices are stabilizing, and may increase, then they are more willing to wait until it is more convenient to sell. I think we've been seeing this change in psychology for some time.

And private mortgage lenders and homebuilders will regain confidence in the mortgage and housing market. Flat to rising prices give homebuilders a better idea of the pricing needed to compete in the market - while more consumer confidence in house prices is leading to more demand for new homes. Note: Residential investment is the best leading indicator for the economy, so this pickup in new home sales and housing starts suggests a pickup in the overall economy (barring exogenous events - like the European crisis - or policy mistakes).

In conclusion: There are many positive economic impacts from flat to rising house prices and we are just beginning to see the positive impact on the overall economy.