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Home prices climbed more than forecast in October, indicating a rebounding real-estate market will bolster the U.S. economy for the first time in seven years.

The S&P/Case-Shiller index of property values in 20 cities increased 4.3 percent from October 2011, the biggest 12-month advance since May 2010, the group said today in New York. The median forecast of 30 economists in a Bloomberg survey projected a 4 percent gain.

Property values will probably keep heading higher as record-low mortgage rates, a growing population and an improving economy spur demand for housing. The turnaround in real estate is buoying household confidence and wealth, one reason why consumer spending is improving even as concern mounts that lawmakers will fail to stave off looming tax increases.

“The housing market is definitely starting to recover,” said Ryan Wang, an economist with HSBC Securities USA Inc. in New York, who’s the second-best forecaster of the S&P/Case-Shiller index over the past two years, according to data compiled by Bloomberg. Higher property values have “added about a trillion dollars to household wealth just since the beginning of this year.”

The boost to household net worth “will provide an important benefit for consumers and for the broader economy,” Wang said.

Shares Drop

Stocks fell, sending the Standard & Poor’s 500 Index lower for a third day, as President Barack Obama and Congress prepared to resume budget talks and retailers slumped after the Christmas holiday.

The S&P 500 dropped 0.5 percent to 1,419.83 at the close in New York. The S&P Supercomposite Retailing Index slumped 1.8 percent, while lumber futures surged to the highest level since 2005 on the continued signs of improvement in housing.

A sustained pickup in housing is a source of strength as the world’s largest economy struggles to overcome concern the so-called fiscal cliff, representing more than $600 billion in tax increases and federal government spending cuts slated to take effect next year should Congress fail to act, will slow the expansion.

Holiday sales grew at a slower pace this year after gridlock in Washington soured consumers’ moods and Hurricane Sandy disrupted shopping, a report yesterday from MasterCard Advisors SpendingPulse showed. Retail sales rose 0.7 percent from Oct. 28 through Dec. 24, the Purchase, New York, research firm said. The increase was less than half the 2 percent advance in the same period a year ago. SpendingPulse tracks total U.S. sales at stores and online via all payment forms.

Richmond Manufacturing

Manufacturing expanded for a second month in December in the area covered by the Federal Reserve Bank of Richmond, according to another report today. Nonetheless, the data showed sales and orders climbed at a slower pace than in November.

Estimates for the S&P/Case-Shiller index in the Bloomberg survey ranged from unchanged to a 4.9 percent gain.

The price increase accelerated from a 3 percent advance in the 12 months ended September. The Case-Shiller index is based on a three-month average, which means the October data were influenced by transactions in August and September.

Residential homebuilding has contributed 0.3 percentage point to gross domestic product on average in the first three quarters of 2012, according to Commerce Department data. The last time it added to growth for an entire year was in 2005, when it boosted the economy by 0.36 point.

Broad-Based Gain

Home prices adjusted for seasonal variations rose 0.7 percent in October from the prior month, with 17 of 20 cities showing gains, according to today’s report. Las Vegas showed the biggest gain with a 2.4 percent advance, followed by San Diego with a 1.7 percent increase.

Property values dropped the most in Chicago, which fell 0.7 percent over the month.

Unadjusted prices in the 20 cities dropped 0.1 percent in October from the prior month. Prices tend to decrease during this time of year, the group said.

The year-over-year gauge provides better indications of trends in prices, according to the S&P/Case-Shiller group. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Eighteen of the 20 cities in the index showed a year-over-year increase, led by a 21.7 percent jump in Phoenix. Detroit followed with a 10 percent gain. Chicago and New York posted declines. Year-over-year records began in 2001.

‘Gathering Strength’

“It is clear that the housing recovery is gathering strength,” David Blitzer, chairman of the index committee, said in a statement. “Higher year-over-year price gains plus strong performances in the southwest and California, regions that suffered during the housing bust, confirm that housing is now contributing to the economy.”

Declining borrowing costs have underpinned demand for those able to get financing. The average rate on a 30-year, fixed mortgage was at 3.37 percent last week, close to the 3.31 percent from a month earlier that was the lowest in data going back to 1972, according to McLean, Virginia-based Freddie Mac.

“Record-low interest rates, attractive home prices, pent-up demand, a lower supply of existing homes for sale, improvement in the economy and employment, and greater optimism are all helping drive the housing recovery,” Ara Hovnanian, chief executive officer of homebuilder Hovnanian Enterprises Inc., said on a Dec. 13 earnings call. “This is occurring in spite of the restrictive mortgage lending environment and the number of underwater existing home buyers.”

Home Sales

Americans bought previously owned homes in November at the fastest pace in three years, figures from the National Association of Realtors showed Dec. 20 in Washington.

The job market remains an area that is holding the world’s largest economy back from a more pronounced rebound, explaining why Federal Reserve policy makers this month said they would keep the benchmark interest rate near zero as long as unemployment remains above 6.5 percent, and if the Fed projects inflation of no more than 2.5 percent in one or two years.

In addition, if Washington lawmakers fail to reach a deal on averting tax increases and spending cuts set to take effect in January, subsequent declines in business and consumer spending may also drive down economic progress.

(Updates with closing stock prices in sixth paragraph.)