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Housing Recovery Resumes

05/12/2011 by Jim Haughey, RCD Chief Economist

The economic environment for housing improved over the last month after deteriorating during the winter. All of the key drivers except home prices are now neutral or positive so progressively improving permits, starts and sales are expected. The three key drivers in this market environment are consumer confidence, home prices and credit access. Confidence is rising but remains at a deep recession level. After a period of stability, home prices have weakened further as legal delays were resolved and a surge of defaulted homes hit the for sale market.

Credit access is difficult to measure but reports from the finance an real estate markets suggest mortgage approval has not become significantly easier. While lenders have available funds for mortgages they are being very cautious in accepting new mortgages. Lenders know that they will held liable for mortgage defaults and they no longer believe that an expanding economy and rising home prices can turn questionable loans into good loans in the next few years.

Lenders are also concerned that the new consumer finance protection agency that will oversee mortgages beginning this summer as yet has no director and has issued no final rules. Lenders have to plan for the worst result. Adding to their concern are the ongoing efforts by Fannie Mae, Freddie Mac and FHA to “claw back” some of their loan guarantee losses from mortgage originators by claiming that the information they received was fraudulent and that the loans were doomed to fail. Parallel to this state Attorney Generals are suing lenders seeking fines and penalties for poor underwriting practices. All of this will be very expensive — many $Billions — for mortgage lenders even though the government previously insisted that they make these marginal or clearly bad loans.

This caution is being implemented by requirements for high down payments, typically 20% and very low home appraisals to provide extra protection for lenders against a further decline in home prices and the next recession. FHA and VA have expanded to n early 50% of new mortgages with down payments as low as 3.5%. But they have also become more cautious because they can n o longer count on Congress to cover their loan guarantee losses. Both have raised guarantee fees, sharply cut back on lending to buy units in new condo developments and required more evidence of stable and sufficient income.

Gradually, an expanding economy will boost confidence, absorb vacant housing units, stop asset price declines and make tough lending approval standards less restrictive. This has begun in the multi family market in many cities but so far only in a few cities in the single family market.

Key Indicators of the U.S. Market Environment — April 2011
Residential Construction (New and Remodeling)

  Year Ago Previous
or Qtr.
Latest Level Recent
on Const.
New Residential
Home Affordability Index (NAR) 178.5 192.2 Feb 192.3 High Rising
Consumer income, % change y/y
(U.S. Commerce Dept.)
4.2 5.5 Feb 7.2 Average Rising
Consumer real income, % change y/y
(U.S. Commerce Dept.)
1.8 2.5 Feb 3.0 Average Rising
Employment change, 000s
(U.S. Labor Dept.)
192 194 Mar 216 Low Rising
Household net worth, % change y/y (FRB) 2.4 3.2 Q4 5.9 Low Rising
30-Year fixed mortgage rate,
% level (Freddie Mac)
5.11 4.81 Apr 22nd 2011 4.8 Low Steady
1-Year ARM mortgage rate,
% level (Freddie Mac)
4.19 3.21 Apr 22nd 2011 3.16 Low Steady
Consumer confidence index
(The Conference Board)
57.7 63.8 Apr 65.4 Low Rising
Housing market index (NAHB/ Well Fargo) 19 17 Apr 16 Low Steady
Homes under construction, 000s
(U.S. Census Bureau)
494 424 Mar 423 Low Steady
New home inventory, number-of-months
supply (U.S. Census Bureau)
7.1 8.2 Mar 7.3 High Rising
Existing home inventory,
number-of-months supply (NAR)
8.1 8.5 Mar 8.4 High Steady
Residential Remodeling
Existing home sales, 000s (NAR) 5,440 4,920 Mar  5,100 Low Steady
Building supply store sales, seasonally adj.
$ millions (U.S. Census Bureau)
23,826 24,483 Mar  25,026 Low Rising
Wood product shipments, seasonally adj.
$ millions (U.S. Census Bureau)
6,712 6,513 Feb  6,470 Low Falling
Remodeling contractor hours worked,
% change y/y (U.S. Labor Dept.)
-13.0 -1.2 Feb  5.5 Low Rising
Mortgage refinancing applications, index
(Mortgage Banking Association)
2,162 2,371 Apr 22nd 2011 1,987 Low Falling

Abbreviations: y/y = year over year; ARM = adjustable-rate mortgage; NAR = National Association of Realtors;
FRB = Federal Reserve Board; NAHB = National Association of Home Builders
Table: Reed Construction Data and Reed Construction Data - CanaData


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