Mixed Signals in Housing Sector

One of the contributing factors to the strong multifamily market is the relative difficulty for home buyers to get a loan, and that was evidenced by the very low lending levels in 2011 according to this article in the Wall Street Journal:

Mortgage lending declined to its lowest level in 16 years in 2011 amid weak demand for mortgages and tighter lending standards, according to a report released by federal regulators Tuesday.

Banks funded about 7.1 million mortgages in 2011, down 10% from the year before, and the lowest tally since banks issued 6.2 million mortgages in 1995. The Federal Reserve analyzed data submitted by more than 7,600 lenders under the Home Mortgage Disclosure Act.

Loans funding home purchases fell by 5% last year and stood 64% below the level of 2006, when the housing market reached its peak. Refinances, which are more sensitive to modest swings in interest rates, fell by 13% in 2011 from 2010 but rebounded at the end of the year, after the average 30-year fixed-rate mortgage dropped below 4%.

Things are beginning to thaw in 2012, but some of that action is due to institutional investors:

The report covers only loans made in 2011. Housing demand has improved this year, largely because investors and other buyers who have been paying in cash have scooped up quantities of foreclosed and other distressed properties. While lending to non-owner-occupants is down sharply from five years ago, it rebounded last year, rising 10% from 2010.

Banks have become much more cautious about making loans since the housing bust. The median credit score for approved loans has increased by about 40 points since 2006. Median credit scores “now exceed by a considerable margin” those for any time in the past 12 years, the report said. The bottom tenth of all home-purchase borrowers had seen an even larger increase of around 50 points.

Still,  any upswing is good news for the home builders and another Wall Street Journal article points out that prices are rising and home building is picking up:

Compared with a year ago, prices in July were up in 16 of the 20 metro areas tracked. Home prices are up by 15% since the end of last year in Phoenix and by 10.1% in San Francisco. By contrast, prices were up by just 1.7% in the New York metro area, the smallest year-to-date gain of any of the 20 cities. Nationally, prices were up 1.2% from July 2011, the largest year-over-year gain since home-buyer tax credits fueled a burst of sales two years ago…

Construction of single-family housing in August reached its highest level in more than two years, though it is still far below its pre-bubble level, the Commerce Department said last week. It is set to report on August sales of newly built homes on Wednesday.

Rising prices largely reflect a dwindling number of foreclosed homes being sold by banks and other lenders as well as stronger demand for those properties from investors. Foreclosures and other “distressed” homes typically sell at larger discounts, and with fewer of those properties selling, prices are under less pressure.

But is the recovery sustainable?

Some economists question whether the budding housing recovery is sustainable, particularly when wage and job growth remain sluggish. While home prices typically weaken during the second half of the year, the pace of such possible declines depend largely on whether the pace of buying keeps up and how banks resolve their overhang of distressed loans that could become foreclosures.

All of this is, of course, of great interest to the multifamily sector. It will be interesting to see how the simultaneous surge in home prices and home building affects the rental housing market, particularly if lending standards stay tight and the job market stays soft. It’s truly a mixed bag of economic indicators.