Why Low Rates Aren't Reviving Housing

For millions of people, it's never been cheaper to buy a home. With rock-bottom prices and record-low interest rates on mortgages, you'd think that prospective homeowners would be champing at the bit to get themselves a piece of the American dream.

What's happening instead is that home sales figures, while showing some gains of recovery, remain far below what you'd expect under such favorable conditions. Below, I'll show you some of the culprits behind the phenomenon, but first, let's take a closer look at why things are the way they are right now.

What's up with housing?
A survey from the National Association of Home Builders from earlier this month shows just how affordable homes have gotten. According to the latest version of the survey, fully 77.5% of all new and existing homes sold during the first quarter of 2012 qualified as affordable for families earning the nation's median income of $65,000. That's a higher percentage than at any time in more than 20 years.

That enthusiasm has carried over into the homebuilder arena. A separate NAHB survey gauging confidence among homebuilders about the housing market climbed in May to its highest level in five years, albeit still at absolute levels that are quite low compared to the market's heyday in the mid-2000s. That in turn has sparked interest in homebuilder stocks, as Beazer Homes (NYSE: BZH  ) , Hovnanian (NYSE: HOV  ) , and PulteGroup (NYSE: PHM  ) have seen promising levels of activity, such as higher order volumes and unit backlogs.

Behind the scenes
Strictly by the numbers, the housing market seems to be in a great position to hit bottom and rebound. So why hasn't that been happening?

The NAHB report points to tight lending standards that are keeping many would-be purchasers from getting financing to buy homes. In effect, the low rates that are a key component of a favorable buyers' market aren't available to many buyers, as they instead have to either pay up for alternative financing or delay purchases until they have enough of a down payment and build up their credit to qualify under stricter mortgage guidelines.

That's consistent with what we've seen from banks. Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) may have settled with state and federal regulators to end their battle over controversial foreclosure practices, but they nevertheless want to avoid any repeat of that episode. As a result, they're less likely to make loans that have any potential of coming back and hitting them in the face.

But perhaps more important is the huge change in confidence among potential homebuyers themselves. Housing expert Robert Shiller pointed last month to the fragile economy as a major contributing factor toward his conclusion that "we might not see a really major turnaround in our lifetimes" for the housing market. Yet in many ways, the housing market itself is the biggest obstacle toward people rebuilding their confidence in the economy, as a return to a functional market in home sales and purchases would allow many people to consider things like moving to areas with more promising job opportunities or are more affordable overall.

Until something breaks that vicious cycle, housing may have a hard time recovering. And with it, millions of current and would-be homeowners will find themselves stuck in a situation they don't want to be in.

Breaking the chain
In some areas of the country, one part of the solution appears to be coming from abroad. Cash-rich foreign investors are picking up property in popular areas of the nation, including Florida and Arizona. With our neighbor to the north having largely avoided the impact of the housing bust, in part because of its more homeowner-responsible lending practices that helped avoid the full extent of the speculative bubble that hit the U.S. market, potential Canadian buyers aren't afraid to dive in and pick up what appear to them to be extremely cheap properties. A strong Canadian dollar also isn't hurting demand.

Foreign buying may give the market a spark, but it's still up to U.S. homebuyers to turn that spark into a lasting recovery. Until homebuyers are in the mood to put their money where their hearts are, the housing market will likely continue to languish.

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Fool contributor Dan Caplinger had questionable timing in buying his house. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of Bank of America and Wells Fargo, and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps you warm at night.


Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2012, at 10:54 AM, chopchop0 wrote:

    " or delay purchases until they have enough of a down payment and build up their credit to qualify under stricter mortgage guidelines."

    Perfect. Hopefully this will avoid a repeat of the last disaster.

  • Report this Comment On May 29, 2012, at 10:56 AM, ravens9111 wrote:

    I guess it depends what you consider "affordable housing." Is paying 35% of your gross income towards housing affordable? I don't think so. The problem here are the debt ratios when qualifying for a mortgage. When applying gross income, I think 20% would be considered affordable. But then you have to factor in all your expenses like taxes, homeowner's insurance, car loan, student loan, credit card debt, etc. Consumer spending can't be fueled by more debt burden. Consumers still need to deleverage and save their money. The only way this can be solved is either through lower home prices or higher income. If housing prices are being artificially inflated by the banks that control the supply of foreclosed homes on the market, and homebuyers aren't earning more money, you won't ever have a real housing recovery.

  • Report this Comment On May 29, 2012, at 11:12 AM, DivingDan wrote:

    Interest rates mean nothing when unemployment is high. Until jobs show up and people are in them for several years, the housing market will continue it's slump.

  • Report this Comment On May 29, 2012, at 11:21 AM, justaboutperfect wrote:

    As long as this country allows trickledown economics for the middle class and gusher up economics for the 10% wealthy class, the greater differential percentage of income for the wealthy will always put a damper on housing. Just think if the middle class had a greater amount of the wealth as they had in the 70's, more houses would be built and more jobs would be created. Get rid of the lobbyists and special interest groups, and then you will find prosperity for everyone.

  • Report this Comment On May 29, 2012, at 12:26 PM, damilkman66 wrote:

    I am of the opinion the housing slump has nothing to do with tricke down economics. We are just going back to what reality should be. In the bad old days it was expected that a potential homeowner put up a minimum 10% and ideally 20%. Anything under 20% had to be covered by PMI. Then banks changed their lending standards. Soon 5% was good enough and packages of no money down were pushed. I won't even go into the gross ratios changing. It got so bad I knew someone who was told he qualified for a 500K loan with a 55K salary. Never mind proof of employement.

    All of this reductions of standards made it such that there was more demand for housing. The increased demand pumped up pricing. The increase in pricing induced the banks to loosen the standards even further in pursuit of even greater profits. The increase then induced speculators to buy homes as investment opportunities that of course fueled more building.

    All we are seeing now is a return to normal behavior. If banking practices had not gone insane, the housing market would be about what it is today. I bought my first house in 1996 for 125K back when lending standards were sane. When I sold in 2001 in was appraised for 180K. The 2nd house I bought in 2001 had been sold for 185K in 1996 and appraised for 300K in 2001. By the peak of the bubble Zillow had it rated almost to 400K. In a span of ten years a property increased in value by 100%!!!

    I think people are using the bubble as their standard instead of historical numbers. The US economy has experience low inflation for a very long time. Housing appraisals historically follow inflation lockstep. I would not be suprised that if we drew a line from 1994 to 2012 and modeled based on inflation, housing values would be pretty close to where they should be if the housing market had not been artificially increased by loose lending practices.

  • Report this Comment On May 29, 2012, at 7:16 PM, skireef wrote:

    The reason financing isn't readily available is due to the recourse requirement on the part of the bank to whoever it sells the loan to (fannie, freddie, fha). That means that if the loan goes into default, the lender has to buy it back. Pure and simple, the banks are waiting for a rock solid market bottom until they relax lending standards. Other than government agencies there is (effectively) no other place to sell the loan so if they are required to buy the loan back they have to keep it in portfolio...... so why take that risk?

    In the go go days, wall street was buying everything, not anymore.

  • Report this Comment On May 31, 2012, at 10:08 AM, StopPrintinMoney wrote:

    Imagine what would happen to the housing market if the gov-t didn't hold or guarantee the loans? By making the interest rates low, they stray the market away from underwriting/holding notes (why bother with 3.5% illiquid risky note on the property that will likely lose value when you can hold a liquid Treasury)? Virtually no one but the gov-t will hold the note. The whole economy is made dependent on the big government - what a mess!

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