The Mortgage Corner

WASHINGTON (MarketWatch) — Home builder confidence in the market for new single-family homes climbed in February for the fifth straight month to reach the highest level in more than four years, said a Marketwatch headline. And there are good reasons for builders’ growing confidence as housing starts, affordability, and even employment continue to increase.

The National Association of Home Builders/Wells Fargo housing market index rose to 29 in February from 25 in January, meaning the gauge has more than doubled since September. Economists polled by MarketWatch had expected a reading of 26.

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Graph: Calculated Risk

“This is the longest period of sustained improvement we have seen in the HMI since 2007, which is encouraging,” said NAHB Chief Economist David Crowe. “However, it is important to remember that the HMI is still very low, and several factors continue to constrain the market. Foreclosures are still competing with new home sales, and many builders are seeing appraisals come in at less than the cost of construction. Additionally, prospective home buyers are finding it difficult to qualify for a mortgage.”

The main reason for increasing optimism is total housing starts were at 699 thousand (SAAR) in January, up 1.5 percent from the revised December rate of 689 thousand (SAAR). Note that December was revised up from 657 thousand. Single-family starts declined 1.0 percent to 508 thousand in January, however December was revised up by 43 thousand from 470 thousand. There were the first two months above 500 thousand since the expiration of the tax credit.

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Graph: Calculated Risk

And the delinquency rate for mortgage loans on one-to-four-unit residential properties also decreased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the fourth quarter of 2011, a decrease of 41 basis points from the third quarter of 2011, and a decrease of 67 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate decreased five basis points to 8.15 percent this quarter from 8.20 percent last quarter.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.38 percent, down five basis points from the third quarter and 26 basis points lower than one year ago.

And, housing affordability is at its highest level in 20 years. Nationwide housing affordability, as measured by the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), rose to a record level during the fourth quarter of 2011, while prospective home buyers continued to feel the constraints of tighter credit standards and a soft economy.

The just released HOI data indicated that 75.9 percent of all new and existing homes sold in the fourth quarter were affordable to families earning the national median income of $64,200, the highest percentage recorded in the 20-year history of the index.

"While today’s report indicates that homeownership is within reach of more households than it has been for more than two decades, overly restrictive lending conditions confronting home buyers and builders remain significant obstacles to many potential homes sales, even with interest rates at historically low levels," said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB).

Despite restrictive credit conditions, low jobs creation is still the main roadblock to a housing recovery. But 2012 may show continued signs of improvement on that front also, as initial unemployment claims continue downward.

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Graph: Calculated Risk

In the week ending February 11, the advance figure for seasonally adjusted initial claims was 348,000, a decrease of 13,000 from the previous week’s revised figure of 361,000. The 4-week moving average was 365,250, a decrease of 1,750 from the previous week’s revised average of 367,000. In fact, the 4-week moving average is at the lowest level since early 2008.

In fact, small businesses provide 70 percent of new hires, so that is where we should look for jobs’ improvement. A good measure of small business is the National Federation of Business Optimism Index, which hasn’t yet risen above recession levels. But the jobs market is tightening, in line with U.S. overall improved employment.

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Harlan Green © 2012

“Reports of workforce reductions are at their lowest level since October 2007,” said the latest NFIB report. “Forty-one percent of owners hired or tried to hire in the past three months, but 31 percent reported few or no qualified applicants for the position(s). The increase in the percent of owners with hard to fill job openings indicates that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate.”

So we will see if builders’ optimism is warranted. It has been a long time coming.  But a new generation of home owners and renters are becoming adults—the echo boomers born between 1986 to 2000. I believe the builders’ optimism is warranted, because echo boomers, or Gen Y’ers, are the children of baby boomers and number more than 80 million, more than baby boomers—in fact, the largest generation in our history.

Harlan Green © 2012