Mortgage Credit Standard Tightening May Be Near an End
The worst of the tightening of credit standards for home mortgages resulting from the emergence of problems in the subprime market early this year may be drawing to an end, NAHB Chief Economist David Seiders told reporters in a July 25 teleconference on the mid-year outlook for the housing industry.
Adjustable-rate mortgages have plummeted to about a 10% share of the loans being used to purchase homes, down from about 40% at the height of the housing boom, he said. And considering the disruption being caused by such nontraditional loans as interest-only and option ARMs, this is “a healthy long-term development” for the marketplace, he said.
After a breakdown of mortgage lending standards in recent years, “maybe the credit pendulum in home mortgage lending has swung back most of the way,” and lending standards aren’t likely to be tightened much further, Seiders said. “We’ve had one heck of a lot of credit standard tightening,” he added, and moving forward “solid” fixed-rate mortgages are likely to be the dominant vehicle for financing home purchases.
While rates on prime conventional fixed-rate mortgages have moved up to some degree over the past couple of months, they remain about where they were a year ago, he said, and are expected to average a relatively affordable 6.7% in 2008, not far from their current level. One-year prime ARMs are projected to average about 5.65%.
Lowering the Forecast
Nevertheless, he said that “tighter lending standards buyers are facing and rising waves of delinquencies, defaults and foreclosures on loans made in the second half of 2005 and in 2006” have created uncertainty about “where we are going” and have added further to the depth and duration of the current housing downswing.
Seiders is now forecasting 1.42 million housing starts for this year and a small improvement to 1.45 million for 2008, down 9% and 15%, respectively, from what he was predicting at the end of 2006.
About 25% of single-family starts are comprised of homes built on owners’ lots, and that has been a relatively stable component of overall production during the downturn, he said. Single-family starts topped out at a seasonally adjusted annual rate of 1.75 million in the first quarter of 2006 and will decline to a low of 1.1 million during this year’s fourth quarter, according to NAHB’s forecast. That would be its lowest level in 10 years and represent a decline of 37% from peak to trough.
Single-family starts have been below their sustainable pace of 1.5 million for a full year, Seiders said, and will not fully return to the level supported by job and population growth until 2010 to 2011.
He noted that, unlike those preceding it, today’s housing correction was not precipitated by major increases in interest rates and a weakening national economy, but by accumulated price increases that eventually destroyed affordability. As a result, the industry is going through a “unique experience” and faces “a fairly slow climb out of this hole” because there won’t be the “usual propellants” of a surge in job growth or a major fall in interest rates that typically occur when the economy emerges from a recession.
Feeling “profound weakness in the condo market,” multifamily production in the second half of this year is expected to fall 6% from the first half, bottoming out at an annual pace of 270,000 units. “It’s hard to know how much, but the winds are blowing” in the direction of some firming of rental production in 2008, Seiders said. The condominium share of the multifamily market is heading to 30% or even lower, down from 50% in early 2006, he said.
Proving its cyclicality and following in the footsteps of the overall housing market, residential remodeling is also losing ground, with some “modest” declines expected in the inflation-adjusted value of total activity this year and in 2008 before positive growth resumes in 2009. The real value of improvements to owner occupied housing is projected to decline by 5% to 6% this year and in 2008, he said.
Ball Still Rolling Downhill
Seiders said that his views on the state of the housing industry seem to be similar to those of Federal Reserve Chairman Ben Bernanke, who apparently expects several more quarters of contraction before things start looking somewhat better in 2008.
“The ball is still rolling downhill to some degree,” Seiders said. “Affordability conditions are still reflecting the abrupt tightening of mortgage lending standards, and there is a sizable inventory overhang, the kind of dimensions we have never had to deal with before.”
Home prices remain under downward pressure, he noted, and the S&P/ Case-Shiller® repeat sales house price index, a reliable barometer of price movements, has shown a 3% price decline from the peak in the fall of last year.
Prices could be headed down a further 5% this year, with the cumulative decline averaging as high as 10% in 2008, he said. Following “massive increases” in home prices, a process underway even before the boom began in 2003, “we will need something like that to get the markets back in better balance,” Seiders said.
The housing correction process is now “very widespread,” Seiders said. In terms of single-family housing permits from the first five months of 2005 to the first five months of this year, only Mississippi, which is still recovering from Hurricane Katrina; Wyoming and North Dakota have seen small increases. The nation as a whole has been down 31%. The worst hit states are Michigan, down 60%; Florida, down 57%; California, down 45%; Minnesota, down 45%; and Colorado, down 42%.
Next year over this year, single-family starts are forecast to rise by 2% nationwide, Seiders said, but 11 states will be flat or experience declines. Florida will see a further 12% decline in single-family production in 2008, he said, but Michigan should finally be getting back to positive growth.