Sep. 19, 2012 at 1:00 PM ET
Don't let the data fool you, it's going to be a long road back to anything like "normal" for the nation's housing market.
With mortgage rates at the lowest levels in a half century, and falling, the housing market is crawling out of the worst recession since the Great Depression.
The National Association of Realtors said Wednesday that home re-sales were up 7.8 percent last month to an annual rate of 4.82 million units, the fastest annual rate since May 2010 and well above analysts' expectations.
Housing starts rose 2.3 percent in August, boosted by single-family home construction, according to a separate report from the Commerce Department. While the pace of single-family home building was the fastest in more than two years, the overall number was less than expected. Permits to break ground on new construction, seen as a bellwether of future sales, slipped.
Since August 2011, housing starts have jumped by nearly 20 percent. But the gain follows a collapse that saw new home sales crash from a nearly 1.4 million annual rate in mid-2005 to fewer than 300,000 last year.
“If you said that activity rose by twenty percent in any other industry the impression would be that the conditions are booming,” said Joel Naroff, chief economist at Naroff Economic Advisors. “In housing, it is still said to be in a recession.”
That housing recession is holding back the broader economy, according to Federal Reserve Chairman Ben Bernanke, who told reporters last week that "housing is usually a big part of the recovery process" but has been "one of the missing pistons in the engine."
Though homebuilders are generally becoming more upbeat, they still face “a lot of roadblocks,” according to David Crowe, chief economist at the National Association of Home Builders.
“We have tight credit for buyers and builders, we have tough appraisals that are often busting a contract and now builders are facing higher prices for some of the building materials,” he said. “I think all of those will keep that recovery continuing to be a modest one.”
Crowe said the industry also will be hit with another major setback if Congress decides to eliminate the deduction for home mortgage interest as part of a broad tax reform package. That, he said, would throw “a pretty awful wrench” into the housing market.
“Many people, even if they don't deduct their interest at the moment, have (done so) at some point during their career of owning their home,” he said. “If you take that away, you take away a significant aid, particularly to the middle class to be able to afford that interest payment.”
To help lower those interest payments and help revive the economy, the Fed announced last week that it will begin buying $40 billion worth of mortgage bonds a month, hoping to drive mortgage rates lower and spur more home buying.
It remains to be seen, though, how much of an impact those lower rates will have. Since the Fed began its historic campaign to drive rates to the floor to heal the damage from the financial collapse of 2008, mortgage rates have been setting record lows.
But while low rates may encourage home buyers to go shopping, cheap money has had little impact on choosy lenders who are demanding much better credit to approve a mortgage application.
“A further fall in mortgage rates is unlikely to trigger a rapid housing recovery when rates are already at record lows and when tight credit conditions mean many households cannot qualify for a new loan," said Capital Economics economists Paul Ashworth and Paul Dales in a report on the housing market.
The economists note that in the second quarter, while the average household’s FICO score was 690, lenders were demanding a score of 745 to approve a mortgage. And anecdotal reports suggest that the lending volume is also being held back by “administrative problems at banks, with the time taken to approve a mortgage application climbing to three months from the normal one (month),” they said.
Tighter credit conditions were confirmed by a Fed report Tuesday showing that banks are demanding higher credit scores to qualify for loans.
"Despite the surge in the government-backed share of home purchase loans ... credit scores of home-purchase borrowers are considerably higher now than at any point in the past 12 years," the Fed said.
Tight credit is one reason more than a quarter of existing-home sales went to buyers who put up cash, according to the latest monthly data.
To be sure, lower mortgage rates have helped millions of households save on interest payments by refinancing their existing mortgages. But with more than 20 percent of borrowers underwater on their current mortgage, millions more can’t qualify to refinance at a lower rate because they don’t have enough home equity to qualify.
Tight credit and the large pool of underwater borrowers slowed the volume of U.S. home lending by 10 percent last year to the lowest level since 1995, according to a report Tuesday by a group of federal bank regulators.
Some 7.1 million home loans were made in 2011, down from 7.9 million the previous year, according to the Federal Financial Institutions Examination Council. Refinancing of home loans dropped 13 percent during the year, while new mortgages dropped 5 percent, the report found.
In 2011, conventional mortgage applications by blacks and Hispanics were rejected more than those submitted by non-Hispanic whites, although the differences between rejection rates were similar to those found in previous years, the FFIEC said. Denial rates were 30.9 percent for blacks, 21.7 percent for Hispanics,14.8 percent for Asians, and 11.9 percent for non-Hispanic whites.
The Fed said the data does not include enough information "to determine the extent to which these differences reflect illegal discrimination."
Borrowers with lower incomes were also more likely to receive higher-priced loans, according to the Fed's analysis.
Areas hardest hit by the foreclosure crisis saw the biggest drop in lending, according to the report.
"The steeper decline in mortgage credit flows to highly distressed areas continues a trend that has been observed since the onset of the housing market downturn," the report said.
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