Housing market slowly recovering, but what happens if FHA standards tighten?

A couple of pieces in yesterday’s Savannah Morning News shed some interesting light on the local housing market and on broader national issues.

In his monthly roundup of data, reporter Adam Van Brimmer quotes a couple of realtors who come across as really upbeat:

More than 400 Chatham, Bryan and Effingham county homes sold in June, the first time sales have eclipsed that mark since mid-2008. Sales were up 5 percent in the first six months of 2011 over the same period a year ago, according to Savannah Multi-List Corporation statistics. And the increase comes despite the absence of a home buyer tax credit that lifted the market in early 2010.

“We can now consider the strong sales of the last few months a trend,” said Monica Spillane, president of the Savannah Area Board of Realtors. “Spring is always our best time of year, but a hard look at the numbers hints that we’re building momentum, not running out of it.”

It’s realtors’ jobs to be upbeat, of course, and the better numbers are certainly a good trend. But the modest uptick in sales and the decline in inventory can’t eclipse the fact that we still have 11 months of inventory on the market. And June is typically a strong month for home sales. Based on pretty simple historical trends regarding yearly turnover of owner-occupied properties and of sales of new homes, we should be seeing close to 600 home sales in a strong sales month like June, far more than the 405 that we saw.

Again, however, increases are increases, even though there’s no doubt that high inventories and the waning interest that’s inevitable in the fall will put further pressure on prices. There’s lots more in Van Brimmer’s article.

Yesterday also featured a really interesting op-ed on the editorial page from Jerry Wardlaw, president of the Home Builders Association of Greater Savannah: “Congress: Back off FHA reform“. He makes a compelling case that plans to lessen the Federal Housing Administration’s role in the mortgage market could have profound consequences for sales, especially to first-time buyers, and by extension for new construction:

FHA has always been the backstop for buyers seeking a mortgage to obtain affordable housing. The majority of these people are first-time buyers.

With the collapse of the housing and financial market, an FHA-backed mortgage is by all accounts the only type of mortgage many first-time buyers are able to acquire. With the new guidelines being proposed by Congress, it could all but end the opportunity for affordable housing.

Buyers of affordable housing are one of the main driving forces of the housing market. If the first-time buyer is taken out of the marketplace, the demand for housing is lowered substantially. Hence, the value of all homes across America drops.

Wardlaw believes that the proverbial horses have already left the barn. In other words, FHA standards perhaps needed to be tightened before or during the housing bubble, but doing so now, when the market is more self-regulating and housing is very weak, would be counter-productive.

I tend to agree with Wardlaw. All my friends involved in real estate, even if their primary sources of income are from rentals and thus could benefit from declining homeownership, agree with his assessment.

But the question is a philosophical one. If we’re seriously going to reduce the government role in private markets, which many Americans favor, how can we justify continued FHA intrusion?

Wardlaw tackles this in an interesting way:

Most of the individuals whose livelihood depends on the housing industry are truly entrepreneurs who believe in capitalism and only wish government would get out of the way so they can do their job. However, when there is no private sector backing for affordable housing, then there is a need for government involvement.

Traditionally, FHA has provided the mechanism for financing not offered by the private sector, which has worked well. Congress should lean on those who understand the issues the best to help set guidelines and think about the value home ownership has to offer and consider the unintended consequences of their actions.

Given the heated rhetoric from the Tea Party and from the Republican Party generally, this logic is going to be a very hard sell.

New construction, which as I have already noted is closely tied to the unemployment rate, is going to remain depressed for some time because of simple lack of demand. And that’s assuming that the FHA stays in the game at its current level. Any move that makes mortgages even harder to get — whether that move comes from the public sector or the private sector — is going to hurt the trades even more.

Just speaking for myself, I know I would find myself more sympathetic to continued government involvement in the housing market at the current levels if conservative voters were not electing representatives with such dogmatic views on issues involving federal expenditures.