National housing market: prices down, activity up

The U.S. housing market is becoming less of a headwind on the nation's economic recovery. For the first time since 2005, investment in residential real estate contributed to U.S. economic output for the past three quarters. 

The housing market is still struggling, but many economists say home sales and construction have likely hit bottom and are now starting to contribute to the recovery. Real estate agents and home builders from Florida to California are reporting more activity as buyers take advantage of prices down by one-third from their peak as well as low rates that have made housing more affordable than at any time in the last decade. 

On the other hand, rising rates as a result of stronger economic sentiment could be a danger to the recovery. If rates on home loans continue to rise toward 4.5%, housing affordability will fall along with refinancing activity, which acts as an economic stimulus. 

The prospect of higher rates is a particular threat given the Fed has repeatedly said an improvement in housing is crucial to the recovery. In response, the Fed could purchase more mortgage-backed bonds in an effort to reverse yields. Another option is extending the Fed's Operation Twist program beyond its scheduled June end. 

Source: The Associated Press