The Recovery in the Housing Market is Still Blotchy

One of the bigger drags on the U.S. economy over the last several quarters has been the housing market.

The disappointment was back again on Thursday morning with new home sales data in March dropping 11.4% to 481,000 annualized units compared to expectations of 513,000 units. Despite multi-year low inventory levels for both existing home sales and new homes sales, housing activity has continued to fall short of Wall Street expectations. Some analysts chalk that up to the severe winter weather, as it is difficult to break ground, let alone build the house in extreme cold, and in some cases arctic temperatures.

Investors got the latest read on existing home sales Wednesday which included a the robust 6.1% month over month increase in March. There was also a pick-up in mortgage applications over the last month as housing affordability indices have improved largely due to the renewed drop in 30-year fixed mortgage rates. That point bodes well for the housing market heading into the spring selling season.

Like any other market, housing is tied to supply. With supply still relatively tight, something the publicly-traded homebuilders have likely recognized, the question is how much demand is there for housing? Data shows despite the continued rise in home prices, the drop in mortgage rates over the last several months has made housing more affordable. That’s a step in the right direction, but there are two demand fixes that could lead to a more vibrant housing market.

The first fix would be more high-quality job creation rather than part-time and other low-wage jobs in hospitality and retail, for example. Those types of openings have been leading job creation over the last few quarters.

Second, the economy needs to carefully expand the pool of potential homebuyers. Data from the National Association of Realtors finds less than one-third of the more than 9.3 million homeowners who went through a foreclosure, surrendered their home to a lender or sold their home via a distress sale between 2006 and 2014 are likely to become homeowners again. The reason behind those potential home-buyers not returning to the market is due to the inability to improve credit or the lack of income to qualify for a mortgage at a time when lending standards have been “overly stringent.” That less than one-third percentage equates to roughly three million former homeowners. For context, 4.9 million existing homes and 439,000 new homes were sold in 2014.

But there’s an upside to all of this. The two most recent readings from the Federal Reserve’s Senior Loan Officer Survey showed that more mortgage lenders are loosening credit standards now than at any time in the past 20 years. If even a fraction of that one-third were able to tap the mortgage market to buy a new or existing home in the coming 12 months, that group would have a positive impact on the housing market, the economy and the companies that serve both.

Still, while loosening mortgage credit standards sounds good, it has to be a balancing act between enabling potential buyers with solid credit scores that have jobs that allow them to cover their payments and enough to meet down payment requirements vs. reflating the bubble that was the last housing crisis.

While it’s nice to believe that everyone should own a home, the harder reality is if you can’t afford it or the ongoing maintenance required then the prudent thing to do would be to not buy one. Living within one’s means may not be fun, but it helps avoid a lot trouble.