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While welcome, don't bet big on America's housing recovery
After a winter of hibernation, buyers and sellers gravitate to estate agents as if they are following a seasonal rhythm all of their own. You do not need to be on a British high street to observe the ritual.

Across the Atlantic, this year’s spring selling season is being greeted with a level of excitement not seen since the financial crisis. In a country that has become painfully familiar with repossessions since its housing bubble began deflating in 2006, the anticipation is understandable.

Average house prices climbed 8.1pc in January compared with a year earlier, according to the S&P Case-Shiller index that tracks prices in America’s 20 biggest cities. Although prices remain well below the peak of 2006, January’s performance suggests this year could build on the last, when prices recorded their first gains since the financial crisis.

The nascent recovery is not just showing up in prices, either. In March, new homes were constructed at the fastest rate for five years, signalling that, after a relative home-building drought, America will again be constructing houses and flats this year.

This relative excitement is not confined to Americans surfing real estate agents' websites. On Wall Street, the housing market is once again threatening to be labelled as the great hope for a substantial strengthening in the world's largest economy this year. And there is evidence that the so far modest - and geographically uneven - rebound in prices is providing some sustenance to the US consumer.

And there is evidence that the so far modest – and geographically uneven – rebound in prices is providing some sustenance to the US consumer. Gains in consumer confidence have been closely correlated to the increase in house prices since early last year, according to Royal Bank of Scotland.

Michelle Girard, an economist at the bank, points out that rising prices should help America’s labour market in at least two ways. With consumer confidence bolstered by higher home prices, companies will be encouraged to hire. A recovery in prices should, ultimately, increase mobility in the labour market as more home owners escape negative equity.

If they sound merely plausible arguments there is already hard evidence of the wider benefits. The construction industry has hired 162,000 people so far this year. Hopes that the housing market can ignite the broader recovery are understandable.

There is no disputing that the US has made progress since it emerged from recession in the second quarter of 2009. After peaking at $12.68 trillion (£8.31 trillion) in the third quarter of 2008, consumer debt had dropped to $11.34 trillion by the end of last year; unemployment has followed a similar path, falling to 7.6pc last month, having peaked at 10pc in October 2009; manufacturing, a critical sector for America’s future, has remained resilient. This is all before you consider the potential tailwind from lower energy prices, which the development of shale gas may yet blow through the world’s largest economy.

But for a country that since the Second World War has become accustomed to bouncing back quickly from recession, there remains a frustration at the lacklustre pace of growth. With the introduction of greater fiscal retrenchment in March, the US recovery also faces a fresh obstacle. The $85bn of spending cuts – as well as the tax increases that followed the “fiscal cliff” agreement in December – were behind the International Monetary Fund’s decision last week to trim its growth forecast for the US this year to 1.9pc from 2pc.

Despite the obvious temptation, it would be a mistake to look to the housing market as the cavalry coming over the horizon. While economists expect it to add to overall growth this year, its contribution has shrivelled since the boom. Residential investment accounts for about 2.5pc of gross domestic product, down from 6.3pc in 2005.

“It’s [the housing recovery] a piece of the puzzle that wasn’t there before,” says Girard. “But can housing by itself lift the economy to a sustainable 3pc growth rate? No.”

The pickup in the housing market will be generating some cheer at the Federal Reserve, which has deployed its third round of quantitative easing in an attempt to stimulate America’s mortgage market. Since December, it has bought $40bn of mortgage-backed bonds a month in a policy that has provided an immediate buyer for the loans that banks make. That has helped drive the cost of a 30-year mortgage in America to near-record lows.

As in Britain, though, the sheer scale of the monetary support still being applied to the US economy makes it harder to gauge exactly how robust the recovery in housing is. What will happen when interest rates eventually rise? Officials at the Fed are betting that when the era of cheap money ends, the broader economy will be strong enough to support a housing market, when mortgages have become more expensive. Right now, no one knows whether the gamble will pay off.

More intriguingly, it is still not clear whether the brutal boom and bust of the 2000s has changed Americans’ attitudes to home ownership. The downturn, as well as a tightening in lending standards, is forcing Americans who, a decade ago may have bought a home, to rent instead. After peaking at 69.2pc in 2004, home ownership fell to 65.4pc in the fourth quarter of last year, according to the US Department of Commerce.

Robert Shiller, a professor at Yale University and creator of the S&P Case-Shiller Index, says the regular surveys he conducts of home buyers suggests that a shift in attitudes is under way. “Homes are not like the stock market,” he says. “People got confused about this. That’s what created the bubble.”

If such a shift is under way, it further tempers hopes that a revival in the housing market will prove transformative to the US recovery. But for the longer-term health of the American economy, we should hope it is happening.

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