Housing on the Mend But Remains Fragile

Housing reports continue to produce mixed results as this sector of the market has been slowly improving. While some areas of this market are performing much better than last year, there are others that continue to struggle towards better numbers. The housing market may be on the mend, but it still remains very fragile.

The U.S. Census bureau and the Department of Housing and Urban Development released the latest residential construction report for the month of July, 2012 on August 16th. According to the report, new home construction was not as high as expected, but still higher than last year's numbers. July housing starts were 746,000, a drop of 1.1%, but also 21.5% above July, 2011. The current number remains well below what is expected to be constructed each year to keep up with normal population growth. At the same time, apartment vacancy rates continue to fall along with the nations supply of available home inventory. As vacancies are declining, rents are rising which could eventually have renters wishing they had purchased a home when affordability was high. Even though the numbers are an improvement from 2011, housing starts are way below the normal amount of new units built each year. Tight credit is making it difficult for home buyers to receive approval for mortgages. Instead of moving to larger homes, existing homeowners are opting for a mortgage refinance as rates remain historically low. Low home prices are also keeping many homeowners from selling, many of which would lose too much money. With the introduction of HARP 2.0, which does not have loan to value caps, the existing inventory also decreased as more borrowers refinance and remain in their current homes.

For the month of July, building permits for privately owned housing units increased 6.8% which is 29.5% higher than those issued in July, 2011. At the same time, apartment construction is on the rise as more rentals are becoming increasingly necessary. Multifamily starts continue to grow on a monthly basis in response to the demand of renters.

According to the National Association of Realtors, existing home sales increased for the month of July, 2012 by 2.3%. Of these purchases, 27% were cash transactions and 34% were first time home buyers. Distressed sales were 24% split evenly between foreclosures and short sales.

While many consumers purchase homes with FHA mortgages, especially newly constructed homes, the increase in the upfront mortgage insurance premium has delayed many from taking this step. These higher closing costs can often push a borrower out of approval range for an FHA mortgage. Another program, the FHA streamline refinance with no cash out, now offers extremely low upfront annual mortgage insurance premium fees. This is keeping many homeowners grounded to their current homes with a refinance instead of moving on to another home. The result is rising home prices for those that are selling again due to lower inventory.

While the amount of new homes is at a 50 year low, there remains a shadow inventory that must be depleted. Foreclosures and defaults continue to happen, although not at the rapid rate of the past few years. Until these issues are addressed, there will be only a slow improvement in the housing market that can turn around at any time for better or worse.

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