The Housing Market’s Impact on the Economy

Market indexes received a welcome boost on Monday when a report was released indicating existing home sales jumped over 10 percent in October. Forecasters were expecting a rise of just 2 to 3 percent. However, the impact of this strong report may be short-lived.

First, October sales were surely driven by the November 30th expiration of the first-time home-buyer tax credit (which has since been extended through mid-2010). Many individuals, who otherwise may have waited, purchased homes for the tax benefits.

Additionally, reports indicate that 23 percent of U.S.homeowners owe more on their mortgages than their properties are worth. Nevada (65 percent), Arizona (48 percent), and Florida (45 percent) skewed national averages, while most states’ rate of underwater mortgages are between 6 and 22 percent. Still, nearly 10.7 million households had negative equity in their homes during the third quarter. This high percentage of mortgages in the red could provide a boost to the existing home sales number because these homes are more likely to fall into bank foreclosure and get dumped into an already saturated housing market, all with lower prices.

For a more telling picture of the direction of the housing market, look for the report on construction and sales of new homes, which is considered a leading indicator of U.S. economic activity. This report comes out Wednesday.