Housing poised for more gains?

There were a couple of stories out Tuesday about housing and its current state. While seeming unrelated, together they help readers make a prediction about which way the market will go.

The first story about new home starts comes from the Wall Street Journal:

New-home construction leapt last month to the highest level since before the financial crisis, driven by a big gain in the volatile multifamily-home segment.

Construction of homes with at least five units rose about 27% in March from a month earlier, to the highest level since January 2006, while single-family homes were down 4.8% on a monthly basis.

The government’s figures for the multifamily sector tend to be volatile. But analysts see continued strength for the apartment market, especially as many families have damaged credit and are locked out from buying homes for several years.

“The processing of foreclosed and delinquent properties is transitioning many households away from homeownership and into rentership, which accounts for the relative strength of multi-family starts over single family starts,” wrote Michael Gapen, an economist with Barclays Capital.

Analysts cautioned against being overly concerned about the decline in single-family construction, especially since the previous month’s figures were the highest since May 2008. The data “do not alter the overall picture of single-family new construction activity, which continues to recover gradually,” analysts at RBS Securities Inc. wrote in a note to clients.

Economists largely believe improvements in the housing market will be a bright spot for the tepid economic recovery this year. Investments in residential projects and home improvements have contributed to overall economic growth for seven consecutive quarters.

That’s good news that more money is pouring into a sector that previously saw little investment. It’s also a good sign that banks are lending to finance new construction as loans have been tight in the past several years. But it’s not just new homes that are getting financing, according to Bloomberg Businessweek.

Even as banks impose stricter mortgage standards, the improving job market is lifting incomes and helping families such as the Schmitts repair credit scores, expanding the pool of eligible buyers and providing additional firepower to the housing recovery. About 7 million mortgage holders have had to leave their homes since 2007 because of foreclosure or a short sale, in which a property is sold for less than is owed, according to RealtyTrac. More than 1 million of them are now eligible for mortgages backed by the Federal Housing Administration, which considers applicants three years after a foreclosure or short sale, says Mark Zandi, chief economist for Moody’s Analytics (MCO). Eligible households will expand to nearly 2 million by the end of 2014. “This could be a significant source of housing demand going forward,” Zandi says. “Lots of people lost jobs through no fault of their own. They will be good credit risks in a reasonably good economy. It was not their willingness that was the problem, but their broad ability to pay.”

As the economy has recovered, Americans have lifted their credit scores by paying off credit cards, car loans, and other debts, says Joanne Gaskin, product management director for scores at FICO (FICO), which assesses creditworthiness. Says Ezra Becker, a vice president at credit bureau TransUnion: “One of the great tenets of credit is that time heals.”

While lending standards remain restrictive compared with the real estate boom, they’re easing. The average FICO score for conventional home loans fell to 761 in February from 764 a year earlier, according to Ellie Mae (ELLI), which provides software to the mortgage industry. Average down payments declined to 20 percent from 22 percent. Lenders may further loosen standards when the current refinancing boom ends and they turn their focus to home buyers, according to Andrew Davidson, president of Andrew Davidson & Co., a consulting firm.

Taken together, that’s more homes and more potential buyers. But it’s hard not to feel uneasy when people start looking to housing to grow the economy and create wealth. So many lost so much turning the last downturn. Here’s hoping that all the optimism is tempered by some caution and realism.