Reviewer: Robert A.Clark, PhD, CFA

With house price affordability on the rise and inventories shrinking, it seems that the housing sector is on the mend. This allowed homebuilding to add to third-quarter economic growth for the first time in three and a half years. The question is whether this situation is sustainable.

In the recent recovery, housing has received a large amount of policy support. From tax credits to refinancing assistance, the government has acted to support the housing sector. Existing home sales have gained 24% since January; there has been a 22% increase in new-home purchases and a 40% rise in single-family housing starts. These are all important aspects of the recovery. At 5%, 30-year fixed mortgages are at a multidecade low. The S&P Case-Shiller Home Price Index has declined a total of 30% since May 2006. This has made homes much more affordable, and the $8,000 tax credit for first-time buyers has supported the affordability issue.

First-time buyers have been particularly active in the market. Congress may extend the Nov. 30 expiration date of the tax credit program, but this is not finalized yet, so buyers are trying to move before the deadline. The demand has resulted in shrinking of the unsold home inventory. Current builder inventory has shrunk to a 7.5-month supply, down from 12.4 months in January. Existing home inventory has also shrunk to a 7.8-month rate in September. The low inventory bolsters price demands.

Sustaining prices will be difficult in the months ahead as policy supports begin to expire. The broader market recovery and improving credit markets will help sustain the housing recovery in the months ahead.

1. Discuss your area's housing market and its current condition.
   
   
2. Debate the role of the federal government in supporting the housing industry.
   
   
3. What policy recommendations would you prepare for President Obama to ensure that the housing recovery is sustained?
   
   
4. Discuss the importance of economic supply and demand concepts in the pricing of housing.
   
   
5. Debate whether local markets that have not appreciated sharply in recent years have experienced the recession in housing differently from markets that appreciated rapidly.

In order to access quiz questions in our weekly Instructor’s Guides, archived Instructor’s Guides or to post comments and messages on our professor blogs, you will need to register using your subscriber ID. If you are not a current BusinessWeek subscriber and do not have a subscriber ID, you can still register and post your ideas and comments on our professor blogs.

Click here to register.