It is getting easier to believe that the US economy is poised for a decent recovery and that growth could even be strong in 2013. Housing is a key reason for what is finally an optimistic outlook.

The run of recent housing data is pointing to a convincing upswing with prices, new activity and builder confidence all rising. Low interest rates — supported by almost four years of the Fed’s zero interest rate policy and now three rounds of quantitative easing — are clearly key drivers of this upswing, but the US is also assisted by very favourable demographics that includes annual population growth of about 2.5 million people.

Until 2007, the US was in the middle of a housing construction boom to the point where there was a horrendous glut of unsold houses on the market. It was inevitable that a housing construction downturn would occur but that fall was compounded by all the ills in the banking sector and a sky-rocketing unemployment rate.

From peak levels, house prices in the US fell by about 35% — in some states, the falls were more than 50%. The number of housing starts reached a peak annualised level of about 2 million in the period 2004 to 2006, but then fell by about 80% to a level below 500,000. A widely watched survey of home builders confidence fell from 65 points to a low of 13, with readings above 50 consistent with expansion in the sector. Housing construction as a share of GDP fell from a peak about 6% in 2007 to an all-time low to be just over 2 per cent now.

It was a disaster and the housing depression was perhaps the most obvious symptom of the US recession.

This housing slump caused the banks to lock in large losses as foreclosures escalated. In addition to losing money that prompted the partial nationalisation of many of the too big to fail institutions, the banks went on a lending freeze, unwilling to add more risky mortgages to their already damaged balance sheets. Those home owners who did not hand back their keys to the bank were left with negative equity in their house and this wealth destruction and job insecurity saw consumer spending remain subdued.

That’s the bad news that appears to be slipping back in history.

Since early 2012, the signs that housing is turning higher are convincing. House prices are about 6% above their lows. Home builder confidence has more than trebled and new housing starts are 50% above the recent lows. There are also signs of a higher housing demand with turnover of established dwellings rising to a two-year high.

There is now a real prospect that the housing oversupply and glut will be rapidly reduced and it is now on the cards that in some states at least, there will be a housing shortage.

In the past four years, the population of the US has risen by about 11 million people to more than 314 million. In that time, there have been about 2.5 million new houses built, including rebuilds. Working on the latest US census estimate of 2.6 people per house, the growth in population means there has been demand for 4 million houses. A large part of this extra demand was met from the prior oversupply, but it now it is increasingly clear the supply and demand dynamics are close to equilibrium.

With population growth still running along at 2.5 million per annum, housing starts need to pick up to at least 1 million to satisfy new demand. So far in 2012, new housing starts have been running at an annualised pace of about 730,000, so construction is still shy of what it needs to be.

If, or rather when, housing starts lift to 1 million or even a little more, housing construction will make a valuable contribution to the return to solid growth.

The markets seem to be convinced that this is the case, with the US S&P 500 index up a thumping 30% since July 2011 to be just 5% from reaching a record high. According to Bloomberg, the subindex of home builder shares has risen 77% since the start of the year, reflecting the recovery in housing.

With the Fed committed to keeping its policy rate at zero until 2015 and targeting mortgage backed securities in its third round of QE, it is easy to be optimistic that this time, the recovery in housing is real. If it is, an era of rising house prices and higher new construction can help return the US economy to a path of decent economic growth. It looks like 2013 will be a year of solid growth in the US with housing leading the way.

*This article was first published at Business Spectator