Why rising housing prices are a good thing

In his State of the Union address last week, President Obama talked about the housing sector and its recovery since the collapse in 2007. For many of us, what happened then and what is happening now is nebulous and can be hard to understand. But, in light of the collapse, we, as a nation, can celebrate our subsequent recovery and rising cost of homes.

The collapse - Simply put, in 2006 and 2007 many banks and lenders were playing fast and loose with the mortgages they were dolling out. In order to close deals, they were promising payments from buyers without the due diligence of making the sure the buyers could actually pay. And sadly many couldn't. Foreclosures increased and the value of homes dropped dramatically.

The recovery - In addition to putting more compliance measures in place to regulate how and to whom mortgages are given, both the federal government and the private sector stepped up to artificially stimulate the housing economy. This happened in two ways.

1. Mortgage bonds. The Federal Reserve purchased (and continues to purchase) mortgage bonds which created a ripple effect resulting in lower interest rates. By purchasing the bonds, the federal government made more credit available and at a reduced cost. Thus, the lower interest rates.
2. Shadow inventory. After the collapse, the number of available homes to purchase due to the number of foreclosures could have been very high. Luckily, major investors have purchased a significant portion of the inventory to rent out until the housing market recovers completely and they can sell the homes at a profit. By purchasing these homes, it has kept the supply of homes low. We know when supply is low, demand is high. And high demand fuels the economy.

So, now, we have lower interest rates and high demand. But, still, how are these increasing prices good for buyers?

Affordability - If there is one good thing about the drastic reduction in the cost of homes, it is that they became very affordable. Think back to the good deals conversation earlier. And although we are now seeing a solid recovery, including the increase in the cost of homes, we have a long way to go before they reach their pre-collapse prices, and even further before they become unaffordable.

Investment - In addition to being the roofs over our heads, our homes are investments for us. So think of it like buying a rare collector's item. As time goes on, you would hope your item increases in value so some day you could turn around and sell it for more than what you paid for it. Homes are the same way.

Economy - Lastly, because so much of our economy hinges on the success of our housing market, to see it recover means good things for the rest of our economy. KSL