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Home prices on the rise: why that is good for US economy

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"Higher home prices are making a difference" for the housing market and the wider economy, Patrick Newport, a housing analyst at IHS Global Insight, wrote in an analysis of the numbers. "Higher prices are ... boosting home sales by nudging fence sitters, who up to now have been waiting for home prices to bottom out before jumping into the market."

Mr. Newport and other analysts cite several other ripple effects:

• The price gains have lifted more than 1 million homeowners "above water" during this year, so their homes are worth more than their mortgage debt, according to analysis by CoreLogic. This reduces the risk of foreclosure. Although delinquency and foreclosure rates remain high (as of June, 10.8 million borrowers had negative equity in their homes), the problems are in decline. 

• The shift has improved overall household finances. As homeowning households feel rising net worth – or at least less fear of having an under-water mortgage – consumer confidence and spending get a boost. On Tuesday, a Conference Board survey of consumer confidence showed a rise in November to its highest level since February 2008.

• Homebuilders have reasons to boost construction, as they see rising prices and a declining inventory of homes for sale. After a recession-induced hiatus, any increase in home building adds to overall economic growth.

• The reduction in underwater mortgages makes it easier for people to move as they search for better jobs. 

Of course, the flip side of rising prices is that potential buyers may see homes become less affordable. The good news for buyers, however, is that as banks see stronger pricing, they'll be more willing to extend credit. Low interest rates are good only if one can get a loan, and the Federal Reserve has expressed concern that credit conditions may be too tight in many cities.

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