U.S. housing starts plunged in February as record-low temperatures across the country forced builders to postpone groundbreakings.

The weather combined with tight lending standards for homebuyers is likely to result in the sixth-straight year of mediocre, single-digit growth in new housing.

Total housing starts fell to a seasonally adjusted rate of 897,000 – a 17 percent drop from the upwardly revised January estimate of 1.081 million. Economists surveyed by Bloomberg predicted that starts would drop in February, but not this dramatically, posting a median forecast of 1.040 million starts.

Building permits in February rose 3.0 percent from January to a seasonally adjusted rate of 1.092 million in February. The uptick in permits signals an improved spring building season compared to the slow growth in construction early this year.

But in the post-crisis housing economy, a strong building season is relative: housing starts totaled 1.06 million in 2014 – less than half the housing peak of 2.273 million in January 2006. It appears it will be years before the market even sniffs the 2 million mark again.

The primary reason for the house market’s slow rate of recovery: dysfunction in the mortgage markets caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since Congress passed Dodd-Frank in 2010, banks have become so risk-averse and have tightened their lending requirements to such an extent that most banks will now only loan money to the most surefire, vanilla borrowers.

Dodd-Frank succeeded in its goal of making banks more cautious, said Mike Englund, chief economist at Action Economics.

“But the question is, do we really want banks to be more cautious? Maybe we want them to be more reckless if we want credit to be available,” he said. “It could be that Dodd Frank simply took regulation of banks too far.”

Mortgage credit was most available to borrowers in July 2006, when the Mortgage Bankers Association mortgage credit availability index hit nearly 900. As a point of comparison, in the MBA’s most recent release on February 1, 2015, credit was available to borrowers at a rate of 118.6 (the higher the rating, the more loose the lending requirements). At the height of the housing boom, mortgages were almost nine times more available to the average consumer than they are today.

Of course, one could argue that mortgages were made too readily available to borrowers at that time – that’s what caused the crash, after all.

But the current underwriting standards are so tight that they exclude middle- and low-income workers almost entirely and allow only wealthy people to get loans. And wealthy people often do not need loans to purchase a new home.

Approximately 27 percent of home sales in the U.S. are transacted with all-cash and no mortgages, according to the National Association of Realtors February 23, 2015 survey of realtors.

There are two ways to make an all-cash transaction: either a buyer happens to have enough cash to buy a home or he flips one house to buy another.

A quarter of all new home buyers at VC Design and Build in Lynchburg, Va., pay cash, says owner Vince Phelps.

“I would say that it is a larger percentage of business than most people would expect – especially for larger homes,” Phelps said. “Ironically, the larger the home, the more likely it’s going to be paid for in cash.”

When wealthy people want to purchase a house — all-cash or no — they usually want an expensive house. And because current lending standards favor the wealthy, the median price for a new home in the U.S. continues to climb rapidly and hit all-time record highs.

The wealthy are buying new homes, which raises the median price for a new home, while the rest of the housing market lags behind.
The wealthy are buying new homes, which raises the median price for a new home, while the rest of the housing market lags behind.

For example, in December 2014, the median price for a new home hit an all-time high of $302,100. To put that in perspective, before this business cycle, the previous all-time high for the median price of a new home was $263,700 in May 2013. In a little over a year and a half, the median price for a new home jumped ostensibly $40,000.

“The Case-Shiller home price index shows that we are seeing an appreciation of all homes, but no where near as fast as the appreciation of the median new home price,” Dr. Englund said. “And that’s not just because of new homes are more valuable than other homes, it’s because we’re only building more expensive new homes. We aren’t building the cheap homes because the people who would buy the cheap homes are having trouble getting mortgages.”

And without a strong base of middle- and low-income earners buying new houses, the housing market will continue its tepid recovery, said Paul Mortimer-Lee, chief economist for North America at BNP Paribas.

“To get a decent housing recovery you need people coming in at the bottom to buy houses, so people can move up the chain – a young person buys an older persons first home, then the older person buys a new home,” he said. “I think given the changes in the mortgage availability that’s not really happening as much as in a typical recovery.”

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