The lack of new construction is cutting economic growth and payrolls. Falling home prices are reducing household wealth, a drag on consumer confidence and spending.
The ideas coming out of Washington aren’t new but mainly extensions or continuations of previous efforts to help homeowners, especially those with underwater mortgages, and to keep mortgage rates low to attract new buyers.
Those past moves have helped homebuilding find a bottom, but that bottom is well below boom levels. Housing starts are less than a third of their record highs of 2006, and home prices are almost 18% below their peaks of 2007, according to Federal Housing Finance Agency data released Wednesday.
Those deep holes in activity and prices are why policymakers want to help housing even more. Any expanded policy actions, however, will run up against a formidable obstacle: the New Normal in the mortgage process.
Lax lending practices fueled the housing boom and created the wave of subprime mortgages that then imploded and pulled down the global financial system and triggered the worst recession since The Great Depression.
After that experience and the heightened oversight by regulators, it is not surprising that the mortgage industry raised the bar on lending standards. Indeed, more prudent lending will prevent mortgages from triggering another financial meltdown.
The question is whether overly cautious lenders will undercut policymakers who hope to boost housing demand.
According to Fed data, the banking sector is keeping in place the high mortgage-lending standards set during the crisis. In comparison, more banks report reversing some of their past stricter requirements for business loans and commercial real estate.
The higher hoops are keeping some potential home buyers on the sidelines and derailing deals.
The National Association of Realtors says pending home sales–which tracks contracts signed but not yet closed–have been rising when compared to year-ago levels.
But many of those deals will go awry. In December, one-third of NAR members reported contract cancellations largely because of declined mortgage applications and appraised values coming in below the negotiated price.
The New Normal in lending means the housing turnaround will remain gradually–no matter what Washington wants. The good news is that absent a financial shock, the sector won’t subtract from the economy in 2012.
