8:33p.m. EST January 22, 2013
Home sales are set to keep marching upward this year after hitting their highest level in five years in 2012, economists say.
Existing-home sales for the full year rose 9.2% from 2011, according to preliminary data, the National Association of Realtors reported Tuesday.
New home sales, which will be reported Friday, have also been improving.
Housing is finally contributing to the economy's recovery. No longer the drag that it's been since the housing bust began in 2006, housing's positive influence will grow more this year, says Moody's Analytics chief economist Mark Zandi.
He expects housing to contribute a fifth of the economy's growth this year. That's a big turnaround from 2009, when it subtracted more than 1 percentage point from GDP growth, he says.
Housing has historically led the U.S. economy out of recessions. That didn't happen this time, and it's one reason the economic recovery has been weak, says David Crowe, chief economist for the National Association of Home Builders.
Now that housing appears to be mending, with prices rising and more new construction, "the recovery will start to feel more normal," Crowe says.
New home sales are especially important to the economy because buyers then spend money on a raft of other items, such as furnishings, appliances and landscaping. Rising home prices, meanwhile, increase household wealth.
December's existing-home sales, down 1% from November to a seasonally adjusted annual rate of 4.94 million, were almost 13% higher than a year earlier, the NAR says.
Last month's numbers were weaker than expected, but "the trend is still up," says Liz Ann Sonders, Charles Schwab chief investment strategist.
Home sales — and prices — are being driven higher by:
-- Interest rates. They averaged 3.38% for a standard 30-year-fixed rate mortgage for the week ended Jan. 17. Average interest rates for 30-year-fixed loans have been below 4% for the past 14 months, Freddie Mac data show.
The low rates, along with home prices that fell more than 30% from their 2006 peak, has vastly improved housing affordability.
-- Job growth. The unemployment rate stood at 7.8% in December, down from its peak of 10% in the fall of 2010. A better job market is enabling more people to move out on their own, which is driving housing demand. Net household formations topped 1 million in each of the past two years, Sonders says. That's more than twice the level of 2009 and 2010.
-- Falling supply. The supply of homes for sale in December fell to 4.4 months, based on December's sales pace, the NAR says. That's the lowest level since May 2005. Supplies are dwindling in the face of rising demand, fewer foreclosures and reluctant sellers.
Not all economists see brighter days ahead for housing, given what market researcher CoreLogic says was a 7.4% jump in home prices in November from a year earlier.
Higher taxes and cuts in government spending, along with still-tepid job growth, will weigh on the market this year, says Steven Ricchiuto, chief economist for Mizuho Securities.
Interest rates, too, aren't likely to go lower unless the economic recovery falters. The low rates have already sucked in home buyers who were waiting to buy, he says.
"You've probably already seen the best of the housing recovery," Ricchiuto says.