Housing Starts Down: Is That Good News? Economic Commentary

More Good Bad News

Disheartening to the markets was the news released early last week that housing starts and permits were down. Just when we needed the housing market to take another step forward. Understandably, new homes are finding it hard to compete with all the great prices of existing listings out there. How could this be good news? When new home construction slows it certainly hurts overall economic growth. However, construction of fewer new homes makes room to get rid of excess inventory caused by foreclosures. In other words, fewer new homes built represents good news as long as existing home sales continue to increase in strength. The trend is up for existing home sales which have unevenly increased in six out of the last nine months — even though they have decreased from the levels of one-year ago due to the expiration of the housing tax credit. And we certainly expect housing starts to continue to strengthen because of the need for multi-family housing in an era in which the ranks of renters are increasing significantly. Multi-family statistics are more volatile and when you strip out the numbers on apartments, single family permits were down only about 2.0% from the previous month. See below in the news section regard an article on the topic of the need for rental insurance if you are a renter.

Lower levels of new single family home construction translate into fewer new homes out there to compete for resales and bodes well for the long-term. As we have indicated previously, the slower economic growth has also been translating into lower gas prices and interest rates. These are favorable factors for stronger economic recovery down the road. And as household formulation picks up, there will be a greater need for housing in the not so distant future. This higher level of household formulation coupled with natural population growth will spur the growth of new home starts and contribute to a very robust economy in the long run. The latent demand will be tremendous. Don’t expect this cycle to hit tomorrow–but it will be coming. Our growing population will need places to live. Even as the economic recovery slows this season, there are positive signs for the future.

More Industry News

More than half — 53 percent — of home owners recently surveyed say they want Congress to leave the federal tax credit for home owners alone, according to a recent opinion poll at HousingPredictor.com. Those surveyed also say they want Congress to instead focus its efforts on instituting other tax advantages to stimulate the real estate market. Some congressional leaders have raised the issue of trimming the home loan interest deduction as a way to increase federal taxes and alleviate the ongoing budget crisis. The home loan interest deduction allows home owners to write off the interest and state taxes paid as itemized deductions on their personal federal income taxes. Source: American Banking News

In two years lenders will need a minimum net worth of $2.5 million to be GSE seller/servicers, a mandate this is beginning to drive merger and acquisition activity. “Right now we’re very busy,” said Chuck Klein, managing partner of Mortgage Banking Solutions, Woodway, Texas. “The [capital] minimum rises, but even if they’re at $2.5 million, it may not be enough.” Klein said he has two merger deals ready to close, and two more in the works. He declined to name them because of confidentiality agreements. “We’re getting at least one phone call a day with people saying, ‘How can you help us?’” He anticipates that over the next 12 to 24 months his company will be “darn active” but he also worries that with the GSEs and FHA requiring such a high net worth requirement “where will all the new lenders come from? It’s a little frightening when you think about it.” A handful of warehouse lenders will accept a minimum net worth of $1 million for a line of credit, but as the GSEs hike their requirements, so too might banks that lend to nondepositories. Some warehouse lenders, such as JPM Chase will only extend credit to firms with $10 million in net worth. Source: National Mortgage News

Jay Brinkmann, chief economist for the MBA, said the huge trade group is spending a lot of time researching employment data to determine who will be the first buyers back in the housing market. National data shows lower unemployment rates overall for people with college degrees even though this group experienced all-time unemployment highs in November, Brinkmann said. Since then, their employment levels have improved, making this cohort the one to watch, he said. When it comes to “who is going to be coming back into the market, we look to education.” “Employment is most likely to improve among college graduates even though unemployment overall is still high,” Brinkmann said. “There were more jobs added among (the college graduate) segment, so this will be the first group to buy homes.” Source: HousingWire

Home buyers appear ill-prepared to take out a home loan, answering basic questions about loan information wrong nearly half (46 percent) of the time according to a Zillow Marketplace survey. In fact, 44 percent admitted they are not confident in their knowledge of home loans or the process. Zillow®, with Ipsos, surveyed prospective home buyers, asking them to gauge their own knowledge of home loans, and asking basic questions about home loan facts. For example, more than half (57 percent) of prospective home buyers who were polled do not understand how adjustable rate loans (ARMs) work. When asked if rates on 5/1 ARMs always reset higher after five years, the majority of home buyers answered yes. In fact, the rate will adjust to the prevailing rate after five years, even if rates have declined(iii). Currently, many borrowers whose ARMs have recently reset have lower rates than they did when they took out the loan. Additionally, one-third (34 percent) of the respondents who are prospective home buyers do not understand that lender fees are negotiable and that they vary by lender. They believe lenders are required by law to charge the same fees for credit reports and appraisals, when in fact home buyers can save money by shopping for the lowest fees. “Most people wouldn’t jump out of a plane if they didn’t know how to use a parachute, yet each year many buyers commit to the largest loan they will take out in their lifetimes without understanding essential information about home loans,” said Zillow Director, Erin Lantz. Source: The Wall Street Journal


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