Is The Housing Recovery Just an Illusion Created by the Federal Reserve?

It’s now conventional wisdom that the housing market — once the anchor that sank the American economy — is the ballast that’s keeping it afloat, however tenuously. The Case-Schiller index of home prices, released last week, showed a sixth straight month of year-over-year increases. Rising home prices buttress consumer demand as home prices are the single biggest source of the average consumer’s wealth. In addition, a recent report on housing starts showed that more new buildings are being constructed than at any point since July of 2008, and a revitalized construction industry could do much to bring down unemployment and spur economic activity.

Jed Kolko, the Chief Economist for the real estate website Trulia, compiles a “housing barometer” that measures how close the real estate market is back to normal based on housing starts, existing-home sales, and delinquency and foreclosure statistics. His most recent reading put the housing market at 47% back to normal. Writes Kolko:

“In the past three months, Trulia’s Housing Barometer has risen from 34 percent to 47 percent, which is the largest quarterly increase since we started tracking the recovery 18 months ago. Not only is the housing market closer to normal than at any other point since the crisis, the recovery is also accelerating.”

In other words, there’s plenty of data to choose from for a housing market bull to make his case. But even if these data clearly show an incipient recovery, what exactly is the reason for it? Tim Iacano of Iacano Research believes that most — if not all — of the recent rise in home prices is a direct result of efforts by the Federal Reserve to stimulate the economy.

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