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More Good News for Housing Market, but Foreclosures Loom on Horizon

February 17, 2012

in This Week in Real Estate | Tagged , , , , , , ,

Home Builders Continue to be Optimistic

home builders optimisticWill Spring bring a new lease of life for the housing market? Home builders seem to think so. They are hopeful home sales will pick up with the warmer weather, ushering in good news for the market and the economy.

For the fifth straight month, builder sentiment in February climbed. This time it rose to 29, according to the National Association of Home Builders/Wells Fargo.  That’s the highest score on the index since May 2007, and up 4 points since January. Although this calls for celebrations, the  numbers are still considerably below 50, which is considered the sign of a healthy market. The last time the index hit 50 was in April 2006, during the housing market’s golden days.

“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 in a release. “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 homebuyers are finding it difficult to qualify for a mortgage.”

The index shows that builders are optimistic about current sales, rising foot traffic, and sales of homes six months out. The enthusiasm stems from increasing interest in home buying, low mortgage rates and rising home sales, according to USA Today.

Although some analysts are skeptical about the survey, others say the numbers are genuine.

“The story here is that pent-up demand is being freed by much easier mortgage conditions, low rates and rising employment,” Ian Shepherdson, chief economist for High Frequency Economics told the USA Today. “It’s real.”

New Home Construction Rises

Some additional good news. According to the Commerce Department, housing starts rose beyond analysts’ expectations in January. New home construction rose 1.5 percent compared to December, the highest growth since October 2008.

On a seasonally adjusted annual rate, that’s 699,000 homes in January. Analysts surveyed by Bloomberg were expecting a seasonally adjusted rate of 675,000 homes.

Although the numbers are encouraging, there’s a small catch. The good showing is mostly because of a rebound in apartment construction, which jumped 14.4 percent.   Construction of single-family homes dropped 1 percent in January, the first slip in that segment in four months.

Foreclosures, tight lending practices, joblessness and falling prices of existing homes continue to hurt the market for new homes. But builders seem optimistic about the future, according to the latest index released by the National Association of Home Builders.

Will Foreclosures Climb in the Near Future?

Yes, says a Bloomberg story that analyzed the $25 billion settlement between the government and five major banks over bad foreclosure practices.

Leading up to the agreement, lenders took a hiatus from processing foreclosures as they found themselves in the middle of an investigation over fraudulent foreclosure paperwork. They were also engaged in a year-long negotiation with the attorney generals of 50 states over the allegations. Now that an agreement has been reached, banks are expected to restart the home seizure process. As they embark on that,  foreclosures are expected to climb in the short term, hurting homeowners delinquent in their mortgage payments. But, analysts say that although some may feel the pinch in the short term, this bodes well for the market in the longer run.

“The best thing about the settlement, frankly, is that it will be done,” said Stan Humphries, chief economist for Seattle-based Zillow Inc., a provider of home-sales data, to Bloomberg. “The shadow of the settlement hung over the market for a year now.”

A rise in foreclosure activity is expected to hurt home prices. Bloomberg, citing RealtyTrac, says that foreclosure filings dropped 34 percent last year. That’s indicative of a huge backlog that could suffocate the market in the near future. RealtyTrac expects foreclosures to be up 25 percent this year.

“I think there’ll be more price weakness, because we’ll see the number of distressed sales pick up,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania to Bloomberg. “But, I think the price declines will be modest. I think the banks themselves are going to be very sensitive to market prices. I don’t think they’re just going to dump property. That wouldn’t be in their best interest.”

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