NEED TO KNOW: ECONOMY

Swing Set

The U.S. housing market is finally showing signs of recovery. And perhaps to President Obama’s benefit, prices are rising in some key states.

Jim Tankersley
May 17, 2012, 1 p.m.

The heal­ing in Miami’s hous­ing mar­ket began in a thin strip of gold-plated neigh­bor­hoods near the beach. And then like a vir­us””well, whatever the be­ne­vol­ent form of a vir­us is””it spread. In Janu­ary 2011, ac­cord­ing to the real-es­tate data firm Zil­low, home val­ues were in­creas­ing in one in five Miami ZIP codes. By Decem­ber, it was three in five. Over the past year, the Miami-Fort Laud­er­dale met­ro­pol­it­an area pos­ted a 1.1 per­cent gain in Zil­low’s Home Value In­dex; in 2013, the com­pany pro­jects that area home val­ues will rise by an­oth­er 5.6 per­cent.

Miami is on the lead­ing edge of what many eco­nom­ists hope is the long-awaited re­bound in U.S. hous­ing. While the na­tion­wide mar­ket is slowly find­ing what ap­pears, fi­nally, to be the bot­tom of its long post-bubble de­cline, home prices have already be­gun climb­ing in sev­er­al metro areas. In what could be a stroke of great for­tune for Pres­id­ent Obama’s reelec­tion chances, many of those lie in swing states.

The list of metro-area hous­ing mar­kets that, ac­cord­ing to Zil­low, are already boun­cing back in­cludes Bo­ston, Phil­adelphia, Pitt­s­burgh, St. Louis, Den­ver, Phoenix, Dal­las, Or­lando, Tampa, and Miami. With a couple of ex­cep­tions, that’s a ready-made it­in­er­ary for a pres­id­en­tial cam­paign swing. Col­or­ado, Flor­ida, and Pennsylvania are toss-up states; Ari­zona and Mis­souri lean Re­pub­lic­an but could yet prove com­pet­it­ive. Those five states add up to 79 elect­or­al votes.

Obama has much bet­ter odds of win­ning those votes if the states’ eco­nom­ies are pick­ing up; the odds of that oc­cur­ring rise dra­mat­ic­ally with im­prove­ment in the hous­ing mar­ket. The ma­jor head­winds that have held back the re­cov­ery, and con­tin­ue to do so, are high gas prices, Europe’s fin­an­cial mess, and the pro­longed hous­ing slump. Of those, eco­nom­ic re­search sug­gests that hous­ing is the most im­port­ant. (It’s also the one neg­at­ive force that Obama can most dir­ectly in­flu­ence; years of mid­dling hous­ing policy by his ad­min­is­tra­tion have not done the eco­nomy, or the pres­id­ent’s reelec­tion hopes, any fa­vors.)

Zil­low’s ex­perts cite two factors to ex­plain why areas such as Miami and Phoenix are com­ing back faster than the rest of the na­tion. The first is that they fell fur­ther, faster; the ra­tio of home prices to per­son­al in­comes in those areas has re­turned to his­tor­ic­ally nor­mal levels, while oth­er areas still have a way to fall. Second, mass fore­clos­ures in those met­ros have left huge pools of renters and large stocks of cheap houses, a com­bin­a­tion that is prov­ing ir­res­ist­ible to in­vestors.

In this eco­nomy, rising home prices are both a sign of im­proved eco­nom­ic activ­ity and a driver of it. De­pressed hous­ing val­ues rob pro­spect­ive small-busi­ness own­ers of one of their best op­tions for cred­it””bor­row­ing against their homes””and thus hold back new busi­ness cre­ation and hir­ing. Labor De­part­ment data show how pain­fully true this has been in the wake of the Great Re­ces­sion.

Small busi­nesses his­tor­ic­ally lead the way in hir­ing after a re­ces­sion, but this time they have pro­duced only half the job gains that lar­ger em­ploy­ers have. Re­bound­ing equity could help change that trend. It also could un­leash a wave of job-driv­ing con­sumer spend­ing; hous­ing debt has de­pressed house­hold spend­ing dra­mat­ic­ally, eco­nom­ists Atif Mi­an and Amir Sufi have found.

Hous­ing prices are still fall­ing, but the rate of de­cline is slow­ing.

Signs are cer­tainly pos­it­ive in sev­er­al of the areas where Zil­low says that hous­ing is already on the mend. Un­em­ploy­ment fell by 2 per­cent­age points over the past 12 months in the Miami, Or­lando, and Tampa areas, the Labor De­part­ment re­ports. Job­less­ness dropped by about 1 point in Phoenix and St. Louis, and by just over half a point in Den­ver and Pitt­s­burgh. The math be­hind this pres­id­en­tial elec­tion is not multi-vari­able cal­cu­lus: The lower those rates fall in big met­ros in key states, the bet­ter Obama’s chances look against Re­pub­lic­an chal­lenger Mitt Rom­ney.

Of course, not all swing re­gions are see­ing hous­ing up­ticks. Zil­low fore­casts an­oth­er year of fall­ing prices for Vir­gin­ia Beach, Va.; De­troit; Clev­e­land; Colum­bus, Ohio; and Char­lotte, N.C.””bad news for the eco­nom­ies of four toss-up states that Obama won in 2008. The hous­ing col­lapse in Las Ve­gas ap­pears to be bot­tom­ing out, which is good news for one of the na­tion’s most battered mar­kets, but prices don’t show signs of rising any­time soon.

The na­tion­al mar­ket has flashed signs of im­prove­ment re­cently. Hous­ing prices are still fall­ing, but the rate of de­cline is slow­ing. Oddly, the brakes have been ap­plied to most fore­clos­ure activ­ity even though a huge back­log of dis­tressed homes re­mains. Home­build­er sen­ti­ment is at a five-year high. New hous­ing starts jumped in April, a de­vel­op­ment that T. Rowe Price eco­nom­ist Jared Franz says “points to con­tin­ued mod­est heal­ing in res­id­en­tial con­struc­tion.”

Ab­sent any mean­ing­ful con­gres­sion­al ac­tion to speed that heal­ing along””and none ap­pears forth­com­ing””the best that can be hoped for is that the good germs of hous­ing health will spread slowly from re­cov­ery lead­ers such as Miami and Phoenix to lag­gards such as Char­lotte and Ve­gas. As Fed­er­al Re­serve Board Gov­ernor Eliza­beth Duke noted in a re­cent speech, “Home prices have ris­en in more cit­ies lately than they have fallen.”

The re­turn to vi­tal­ity will take time. Zil­low’s chief eco­nom­ist, Stan Humphries, cau­tions in a re­search note, “The re­cov­ery in most areas will be a hy­per-loc­al pro­cess, where in­di­vidu­al ZIP codes will start to re­cov­er be­fore the metro area as a whole.” Humphries likes to show off time-series maps doc­u­ment­ing how rising prices in one ZIP code spill over in­to nearby neigh­bor­hoods and then spread, quickly, across a city. It’s a sort of con­ta­gion. The happy kind, the kind that Obama des­per­ately needs.

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