Housing Hangover - Feeling Better but a Headache Nonetheless

It’s all over the media, how the housing market is emerging from the doldrums and beginning to recover from the six-year downturn that’s done a lot of harm to the economy. However, if we consider the market crash to be a drunken night, the “recovery” might be considered to be the morning hangover that lasts well into the day. Sure, the worst is over, but there is still a massive headache and Ibuprofen in mega doses is still going to take some time for a full recovery.

Data released this week show that housing starts fell 8.5 percent in January, though single family housing starts edged up higher. Building permits also posted gains in January. With all of the good news comes the realization that home construction remains less than half of what it was in late 2005. Though there were steady sales gains in housing throughout 2012, a report this week showed sluggish sales starting out this year. The Northeast is the slowest area of the country, with other segments showing steady though anemic growth in home sales.

While this can be called a “recovery,” there are many differences in this market when compared to other past housing market turnarounds. With the lowest interest rates in decades, you’d expect sales to skyrocket, but they’re not. Lenders, bailed out by the government after massive lending debacles, are now being very choosy who they lend to. Down payment requirements have risen, and the FHA is the lender of choice right now with 3.5% down payments still available. However, the credit score requirements and income scrutiny have increased dramatically. Basically, it’s really tough to buy a home and get a mortgage right now ... even if you want to.

Other weights on the recovery are low inventories in most areas of the country. Building slowed to a crawl over the last six years, and it’s going to take a few years to catch up. Existing home inventories are also very low, as homeowners who can hold out are waiting to try and get back some of the equity lost since 2006. Those are the lucky ones, the ones with some equity. Many homeowners simply cannot list their homes for sale because they owe more than they are worth. So, they’re waiting as well, and inventories are expected to remain low for some time.

So, the “recovery” word is very much one viewed quite differently depending on your position in the housing market. A would-be seller underwater on their mortgage isn’t very excited. Buyers aren’t excited either, as few can qualify for a mortgage or cough up the necessary down payment. However, it’s still looking like a great market for rental property investors for some time to come.