NEW YORK — Don’t be quick to read strength in the January jump in housing starts. Home builders still face a raft of obstacles, not the least of which is the shrinking number of people able to get a mortgage.
Housing starts surged 14.6% in January to an annual rate of 596,000. All of the gain, however, was in apartment buildings of five or more units.
Multiunit starts jumped 80% to a 171,000 pace, the highest level since February 2009.Read the complete housing story on MarketWatch.
Starts of single-family homes fell another 1% last month, on top of an 8.4% fall in December. The declines follow the downtrend in home sales since last summer when a federal tax credit for home buyers ended.
In addition to the drags from high unemployment and record foreclosed homes for sales, another reason holding back housing is that banks are more particular about who qualifies for a mortgage.
The latest survey of senior loan officers compiled by the Federal Reserve in January indicated slightly more banks were still tightening their mortgage standards than the number that were lowering them. [By comparison, more banks were easing rather than tightening their standards on industrial loans, and they were evenly split on commercial real estate loans.]
While the net percentage of banks now tightening on mortgages is far lower than during the housing collapse, the number still indicates banks are wary about home-lending. And if fewer people qualify for a mortgage, it stands to reason that there will be fewer home buyers and thus fewer housing starts.
The bars to cross aren’t just high credit scores or income verification. As reported in Wednesday’s Wall Street Journal, downpayments are also rising.
The median downpayment in nine metro areas crept up to 22% of the purchase price at the end of 2010, double the rate three years earlier, according to real-estate tracker Zillow.com.
Even though the median price of a new single-family home has fallen sharply to $241,500, the higher downpayment hurdle means potential buyers need about $48,000 in cash on hand, plus extra for closing costs.
The recent rise in mortgage rates is also curbing home buying. According to the Mortgage Bankers Association, the average rate for a 30-year fixed mortgage is up to 5.12% compared to 4.78% at the start of 2011, and applications to buy a home have dropped 9% since then.
Another problem in the mortgage market is the uncertain future for Fannie Mae and Freddie Mac, the agencies that guarantee about 90% of all mortgages written in the United States. If the government decides to shut down Fannie and Freddie, it is unclear how the private mortgage sector will perform or what standards buyers will have to meet to qualify for a loan.
People still need to live somewhere, of course. Which explains why builders broke ground on so many more apartment projects in January.
“If there’s any hope for housing construction, it is not in home ownership but in rentals,” said Joel Naroff of Naroff Economic Advisors. “The surge in multifamily activity, which really started in the second half of last year, is an indication that builders may be looking toward the rental portion of the market, not just condos, as the way to stay in business.”
The curb on construction from higher mortgage standards is not an argument that lenders should return to their free-wheeling ways of the boom. Higher standards should prevent a new round of defaults even if home prices stay at current levels.
Housing, however, is one of those “big-ticket items” that needs financing. Few people have the cash to buy a home outright. Raise the bar on financing and demand will remain weak, meaning housing will be a drag on growth for some time to come.
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