The housing market has been making a modest but steady recovery, helped by the Federal Reserve's efforts to give the economy a boost through lower interest rates. The Fed earlier this month announced a third round of bond buying in an effort to stimulate the economy and attack unemployment, which has been stuck above 8 percent since early 2009.
Sales of previously occupied homes jumped in August to the highest level since May 2010. Builder confidence is at a six-year high and construction of single-family homes rose last month to the fastest annual rate in more than two years. However, even with the gains, home sales and construction remain well below healthy levels.
On Tuesday, the Standard & Poor's/Case Shiller home price index showed home prices increased 1.2 percent in July compared to July 2011. That was the second straight year-over-year price gain after two years when prices had fallen every month compared to the same month in the previous year.
The broader economy is expected to benefit from rising home prices. When home prices rise, people typically feel wealthier and spend more. Consumer spending accounts for 70 percent of economic activity.
Home sales have been bolstered by the lowest mortgage rates on record. The average rate on the 30-year fixed mortgage touched a record low of 3.49 percent last week. The rate has been below 4 percent all year. Some economists are forecasting that the Fed's new program to $40 billion a month in mortgage-backed securities will push 30-year mortgages down close to 3 percent in coming months.
In addition to increased demand from buyers attracted by the low rates, prices are also rising because of a decline in foreclosures and sales of other deeply discounted homes. Many homes in the foreclosure process will likely come on the market in the coming months, which could drag on prices.
However, the factors supporting a revival in housing must confront lingering problems. Many Americans, particularly first-time homebuyers, are unable to qualify for a mortgage or can't afford larger down payments, tougher standards that banks are requiring following the subprime mortgage crisis.
Though new homes represent only a small portion of the housing market, they have a disproportionate impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to statistics from the National Association of Home Builders.