David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com
Anje Jager/agencyrush.com David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com

New-home sales hit a record low in 2011 at less than one-quarter of their peak level. Early 2012 saw some advancement but nothing like past recoveries. Yet, mortgage interest rates remain at record lows and house prices are back to early 2000s levels. What’s taking so long for the fundamentals to kick in?

The hurdles are numerous and intertwined. Some are likely to diminish over time while others may persist. Demand is down as fewer households have formed since mid-decade. Household formations slipped from 1.1 million per year from 2000 to 2004 to half that in 2008 to 2011. Fewer household formations reduce the need for expanding the housing stock. The households that did form were renters, so there was virtually no expansion in the homeowner single-family market.

The primary reason for low household formations has been the slow employment recovery and slow or no income growth. Average monthly job growth in the first two years of past recoveries was 156,000 but in the first two years of this recovery the economy added 34,000 jobs per month. Real incomes have shown virtually no change since 2006. Slower growth in employment and income along with loss of equity in investment portfolios has dampened consumers’ willingness to take on new debt until their net worth recovers. Existing-home owners are further impeded by low or no equity gain, and at least 10 million don’t have sufficient equity to cover the outstanding mortgage. Slow or no growth in income and investments means first-time home buyers haven’t been able to save for a down payment.

Low demand has been accompanied by excess supply as homeowners default on their mortgages and leave behind several million existing homes. There are 14 million vacant year-round homes, which is about 2 million more than normal plus another 3 million seriously delinquent mortgages. There is some overlap between these two categories, and some of these homes are in poor shape or in undesirable locations. But the extra existing-home supply has and will remain a drag on the new-home market.

The one place where there is inadequate supply is in the new-home market, which has the lowest inventory in the 50 years of available data. There are fewer than 50,000 ready-to-occupy new homes available in the entire country. At current existing-home sales rates, that supply would last four days. A primary cause for the low inventory is builders’ restricted access to credit. Outstanding single-family production credit fell 79 percent in the most recent four-year period while other construction lending fell only 58 percent. Given the historic level of bank lending to single-family AD&C financing, current lending is short at least $40 billion.

Those potential home buyers who do have sufficient income and cash to purchase a home still must overcome several obstacles. Home prices are still declining on a national basis, although the rate is diminishing to a negligible amount and many markets are experiencing increases. But buyers must be convinced that increases are here to stay, and they won’t see their purchase decline in value. Overcoming that fear and signing a contract to purchase still does not remove all hurdles. Buyers must meet unusually high credit qualifications, including higher credit scores and down payments and lower payment-to-income ratios. The average credit score for conventional loan applicants that were denied credit was around 730, which is 20 points or more higher than the average successful conventional loan applicant before the boom.

Unreasonably low appraisals are the final stumbling block to closing a sale. One-third of builders recently reported losing a sale because the appraisal was below the contract price, and more than half reported the appraisal was below the cost of production. Amazingly, even with all of these hurdles, new-home sales did increase 12 percent in the first quarter of 2012. Removing a small number of these interrelated obstacles can break the log jam and start a real recovery.