Home construction is beating economic forecasts, and mortgage rates are at record lows – but good luck getting that loan
Call it the tale of two housing recoveries. The US housing market is surging back far faster than experts predicted, and banks and homebuilders are reaping the benefits – but a large swath of homeowners, at the bottom of the financial food chain, are still struggling with the mess of foreclosure and uneven access to loans.
One economic number, released today, illuminates how fast housing has come back. Homebuilders are building new homes at a rate that has surprised even economists. “Housing starts are off the charts,” noted Patrick Newport, US economist for IHS Global Insight. US housing starts, which measure new construction, boomed in December with ground broken on 954,000 new homes. That’s the highest rate in four years. Economists had expected that only 890,000 new homes would be started.
There are several reasons for the jump. Jim O’Sullivan, chief US economist for High-Frequency Economics, attributed it to better weather. Newport, at IHS, suggested that rebuilding in the wake of hurricane Sandy could have boosted the numbers.
But the trend isn’t that of a single month. A housing recovery has been under way since last year. Another measure, home-building permits, hit its highest point since July 2008. Homebuilders have been seeing a lot of financial encouragement for their efforts, with their stocks hitting new highs all throughout last year, even fueling fears by some commentators that there could be a bubble in housing stocks.
Banks are also seeing the financial benefits. Bank of America signed 42% more mortgages in 2012. JP Morgan, which announced its earnings this week, saw its mortgage banking unit move to an income of $418m, from a $269m loss a year ago. By its own account, the bank has been doing booming business: JP Morgan reported new home loans of $51.2bn, up one third; the bank said it originated 920,000 mortgages in the past three months.
In short, there’s lots of money in housing right now – unless, that is, you’re a homeowner or a would-be homeowner, in which case you’re probably not seeing your financial life get any easier. Mortgage rates are still at record lows – but good luck getting that loan.
First, mortgage loans are likely to drop off this year, according to the Mortgage Bankers Association. The MBA predicts that 2012 data will show that there were $1.7tn of new mortgages in 2012, but only $1.3tn in 2013 – a drop of one quarter.
Add to that the fact that almost all the activity in mortgage loans last year – more than three-quarters of it – was in refinancings. So if you’re a first-time homeowner, or want to be, it is likely no easier for you to get a loan as it was two or three years ago.
In addition, refinancing is not a friendly business. Homeowner applications for refinancings – looking to take advantage of low interest rates – fell slightly during the end of 2012 but have been on the uptick so far this month; in fact, they are up 15% compared to last week, according to the Mortgage Bankers Association.
But good luck getting an actual loan, even for a refinancing: banks are responding to applications for refinancing very slowly. Bank of America Merrill Lynch predicted that refinancing applications would be 8% slower in January, continuing a several-month trend.
On the one hand, you might think that slowing mortgage applications means that banks are being more careful, or choosing only the strongest borrowers. That is probably not the case. A joint report from Equifax and Moody’s last year found that by February 2012, banks made one-third of consumer finance loans to borrowers that would be considered “high-risk”. The trend holds for automotive loans too; Experian Automotive found that, between August and October of 2012, subprime buyers were responsible for 42% of all car loans.
It could also be simply that banks are overwhelmed by volume; that is likely true, in some small way, because applications are up – but applications have not risen so far, so fast, that the volume should be impossible to handle.
Another way in which homeowners are watching the mortgage money pass right by them is the foreclosure crisis, which is still ongoing, although it seems to have been forgotten in the improving economy except when some bank settles a lawsuit. At the peak of the housing crisis in 2009, there were 2.9m foreclosures; that number has fallen to 1.84m, according to RealtyTrac, with 1.5m homes still in some stage of foreclosure. Yes, that’s down from 4.3m in 2009, but that’s still a lot of people fighting it out to keep their homes.
RealtyTrac believes 2013 will bring more foreclosures as all the ones that have been delayed come to fruition this year. There are still 25 states that saw an increase in foreclosures, with Florida leading the pack.
The temptation is to believe that homeowners that have been foreclosed upon caused their own troubles – but that is not entirely the case, if you look more closely at the wave of news showing that banks and mortgage firms committed foreclosure abuses and made it harder for consumers to find mortgage relief or negotiate payments.
There’s really no evidence that those old abuses are entirely gone, and multiple stories have shown that banks are not necessarily eager to help people escape foreclosure. The New York Times had a chilling story in December that showed that widows were being thwarted from solving their mortgage-payment problems because many banks don’t recognize them as holders of mortgages that were signed by their late husbands.
The problem that ruled during the financial crisis is still ruling the mortgage market: banks will negotiate the terms of debt with each other, but they don’t extend the same consideration to consumers. Where one bank can convince another to renegotiate a difficult debt payment, whatever loan documents a consumer signs is apparently set in stone.
Against this backdrop, this asymmetry between the benefits of banks and homebuilders and the challenges faced by homeowners, the housing crisis will really never end, no matter how good the numbers look. The housing crisis was not a crisis of numbers; it was a crisis of ethics. A housing recovery, similarly, has to be a recovery in how well good judgement has returned: a recovery in better lending, better borrowing, and better building. It also has to be a recovery for consumers as well as companies as banks. Otherwise, no matter how good the numbers look, they are just the building blocks for another crisis.