Housing starts stop

Housing’s decline drove the economy into the ground six years ago. In recent months, many have hoped that housing’s return is a sign of broad economic recovery. The picture has been rosy. The National Association of Realtors reported 21% growth in the median sales price of new homes over the two year period that ended in May of this year. Such rapid increases are consistent with the eye-popping growth that occurred year-over-year before housing’s crash.  But, despite this recent growth, it’s not clear that housing’s robust return is here to stay.

According to the Commerce Department, housing starts have taken a sudden and surprising hit. For June, housing starts had an annualized rate of 836,000 units. This rate is down 9.9 percent from the prior month and the lowest rate since August 2012.  Further, the rate is far below the 959,000 pace that economists had predicted, according to a Reuters survey.

Worry arises among investors, homeowners, and banks because it remains unclear how well housing will hold up as the Fed allows interest rates to rise from their extremely low levels. The stock market, which tends to be far more volatile than housing, initially responded to Fed Chairman Ben Bernanke’s “tapering” pronouncements with a sudden dip. Although stocks have since recovered nicely from that dip, several more housing reports will be required to see how housing will be affected.

Some slowing in the housing sector–in particular, moderation in price growth–may actually be a welcome development. Year-over-year price growth of about 3%, consistent with broad based long-term inflation measures, is healthy. Double-digit growth is not. Of course, few wish to return the panic and frenzy that dominated the housing market pre-crash.  Interest rate tapering may be just what the market needs to avoid another bubble.

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