Homes See Biggest Price Gain in Years, Propelling Stocks

All 20 cities tracked by the Standard & Poor’s Case-Shiller home price index posted year-over-year gains, as they have done for three consecutive months now. The 20-city composite index rose 10.9 percent over the last year. That is the biggest annual increase since April 2006. Several cities – Charlotte, N.C.; Los Angeles; Portland, Ore.; Seattle; and Tampa, Fla. – had their largest month-over-month gains in more than seven years.

Continued strength in the housing market is welcome news for the rest of the economy, particularly given federal government spending cuts that went into effect in March and the end of the payroll tax holiday in January. With home values rising, the construction industry has been more motivated to ramp up building and hire back workers. Consumers are also feeling wealthier and so are more willing to spend money.

“We’ve been sort of pleasantly surprised by the resilience of consumption at the beginning of the year,” said Daniel Silver, an economist at JPMorgan Chase. “Spending has been doing quite well, at least for this expansion, over the first half of the year, due in part to these wealth effects.”

The positive impact of rising home values and the appreciating stock market is expected to offset “at least a third of the fiscal tightening,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors.

Consumer sentiment has already been improving. On Tuesday, the Conference Board reported that its Consumer Confidence Index rose in May to its highest level since February 2008. Consumers’ assessments about both current conditions and their expectations for the future improved substantially, after having plunged in January after gridlock in Washington over fiscal issues.

“Five years after the start of the financial crisis in earnest, and four years and a week’s time from the beginning of the economic recovery, we’re finally starting to get more of a pickup, more of a reduction in caution in terms of consumers’ behaviors,” said John Ryding, chief economist at RDQ Economics. “It’s been a very drawn-out process, but you have to remember what we’ve been digging our way out of, and after all it’s a far less drawn-out process than what’s been taking place in Europe.”

The strong housing and consumer confidence numbers bolstered the markets, with both the Standard & Poor’s 500-stock index and the Dow Jones industrial average up nearly 1 percent in early afternoon trading.

The double-digit housing price increase is being driven by a confluence of factors.

One, the economy over all has been recovering, so people are finally willing to start buying again. At the same time, the inventory of homes available on the market remains unusually low, thanks to little new building in the last few years and the large number of underwater homeowners who are unwilling or unable to sell..

The limited supply, coupled with growing demand, has pushed prices higher. Of course, higher prices could encourage some homeowners to come off of the sidelines and finally place their homes on the market.

“You’ve had this dynamic that has been favorable for price increases now, but it’s also favorable for supply to come back on market, so that will mean some moderation in the pace of price increases,” said Mr. Silver, who said that he expected home prices to continue growing but not necessarily at the double-digit rate seen in May.

Additionally, there are fewer distressed sales – that is, foreclosures and short sales. As a result, the composition of home sales includes fewer sales at depressed prices to bring down the overall numbers.

Finally, home prices in many areas experienced severe, unsustainable plunges during the recession. Now, prices are returning to healthier levels, and coming off a very low base, so the price appreciation looks sizable.

“Some of the areas with the largest declines in house prices during the crisis have shown the strongest increases in prices more recently,” said Mr. Silver.

In Phoenix, for example, home values have risen 22.5 percent from a year earlier, and Las Vegas likewise posted a 20.6 percent gain.

Economists generally expect home prices to continue rising, particularly as the economy improves and more young people move out of their parents’ homes. And many dismiss concerns of a potential bubble, because housing prices remain well below their highs. Even after 10 straight months of year-over-year gain, the 20-city composite price index is 28 percent below its previous peak in July 2006.

“Talk of a house price bubble seems premature,” said Ed Stansfield, an economist at Capital Economics. “In relation to incomes, rents or their own past, U.S. home prices still look low.”

Victoria Shannon contributed reporting.