Broad Housing Recovery Appears Under Way: Zillow Economist

But could a cap on the home mortgage deduction -- needed to close the budget gap -- upend the recovery?

As Americans gather in their homes for the Thanksgiving holiday, recovering from their various labors, many can give extra thanks for what seems like fresh evidence of a recovery of their home values.

According to Zillow, rising home sales in October marked the 12th consecutive month of real estate price appreciation.

“We’ve reached a milestone with one full year of monthly home value gains,” said Stan Humphries, Zillow’s chief economist, on the real estate website’s blog Tuesday. Humphries dismissed skepticism about foreign money fueling the recovery and foreclosures still to come, stressing lower prices, economic recovery and household formation as reasons for the trend.

“The bottom line is that homes are more affordable now than at any time in recent memory, and buyers are seizing this opportunity,” he added.

October price gains were substantial, rising 1.1% nationally from the previous month – the largest price jump in over seven years. Prices also rose by 4.7% over last year's level, the largest gain in over six years.

The home price gains also have the virtue of appearing to be widespread geographically, and in some cases the appreciation was in the double-digits. Zillow reports large October gains in Phoenix (22.3%), San Jose (11.4%) and Denver (10.4%).

The American Enterprise Institute’s Mark Perry, writing on his Carpe Diem blog, noted the especially large gains in home sales in Texas cities not counted on the widely followed Case-Shiller composite index of 20 major metropolitan areas: Austin (37%), Houston (35.1%) and San Antonio (19%) all saw a huge gain in the pace of home sales since October 2011.

“We can see all of the essential elements of a housing recovery in markets like Houston and Austin,” Perry wrote on his blog. “Rising home sales on a year-over-year basis for more than a year, rising sales volume, increasing median and average home prices, faster marketing time, multiple offers and falling inventory. In other words, that’s what a housing recovery looks like, and we’re seeing signs of that kind of housing recovery in metro areas all over the country.”

Perry also noted that Case-Shiller is limited to a three-month moving average of home prices only, with a two-month lag, and hence fails to capture the broader gains indicated by increased home sales in more dispersed metropolitan regions that is already apparent.

While the increased pace of sales and year-long trend of higher prices may be encouraging to homeowners, the housing market may face significant headwinds from Washington.

As the White House and Congress scrounge for new revenues to staunch trillion-dollar-plus annual deficits and a coming “fiscal cliff,” a new limitation on the home mortgage interest deduction is now on the negotiating table.

The Wall Street Journal reports current discussions are targeting a $35,000 cap on deductions. The Journal quotes National Association of Home Builders CEO Jerry Howard saying: “Doing anything to further chill the housing sector will retard the nascent recovery that we’re in right now.”

Builders, who particularly benefit from the deduction as existing homeowners trade up to more expensive homes, are particularly hopeful that the recovery is finally here.

The Commerce Department reported Tuesday that October housing starts jumped 3.6% from September to a seasonally adjusted annual rate of 894,000 starts. That is the highest rate in over four years. Meanwhile, building permits for new construction rose 30% over last year.

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