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 (NYS: BZH) , Hovnanian (NYS: HOV) , and PulteGroup (NYS: 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 (NYS: BAC) and Wells Fargo (NYS: 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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At the time thisarticle was published 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.

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