Why is Housing Booming While the Economy Slows Down?

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Why is Housing Booming While the Economy Slows Down?

In June, construction of new homes in the US rose at the fastest rate since October 2008. Housing starts jumped 6.9 percent to 760,000 annual rate last month, which is much higher than the upwardly revised figure of 711,000 in May, according to the Commerce Department. It gives a brighter outlook to the real-estate market.

However, the permits for new construction declined 3.7 percent to 755,000 from 784,000 in May, which shows that builders are more cautious over the uncertain economy. The Western region showed 36.9 percent jump, and new construction in the Northeast increased by 22.2 percent. Housing starts declined 7.3 percent in the Midwest, and 4.2 percent in the South.

Cheaper properties and record-low mortgage rates are the positive signs that attract new buyers, and encourage builders. These two are the important reasons housing industry is picking up lately. According to Freddie Mac, the 30-year fixed mortgage rate has come down to 3.56 percent, the lowest since 1972.

“Demand has bottomed out, and we expect continued improvement,” said Yelena Shulyatyeva, a New York-based economist at BNP Paribas. “We’re in a recovery, a very slow one.” A recovering housing industry will help boost the struggling economy. Huge amounts of finished goods and raw materials are required, and construction directly or indirectly employs millions of people.

Foreclosures remain a headache, as the initial notices increased 6 percent in the second quarter from the same period last year. It is the first yearly jump in foreclosures since 2009.

The chairman of the Federal Reserve, Ben S. Bernanke, indicated in his testimony to Congress on Tuesday, that the housing industry is mending, albeit slowly. However, the sovereign debt crisis in Europe, and the US fiscal policy is still the cause of concern. Planned belt tightening from next year by the government would hamper economic recovery, he added.

Even the increased pace of construction looks dull, if we compare it with historical standards. According to analysts at MarketWatch, the housing starts should have been over 1.5 million a year in a normal economy.

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