New Construction Not Rebounding With Housing Due To Tight Lending

by Editor on June 8, 2013

new construction : upper market street san francisco (2013)

While the bursting of the housing bubble and the accompanying crippling real estate market crash is starting to shrink in our rear view mirrors, the road ahead is still uphill.

Fortunately, the housing market is recovering in the wake of a Great Depression-level collapse but the dynamics of such a recovery are presenting interesting caveats. Analysts and investors (not to mention a fair share of eager home buyers) are all focusing on housing inventory, financing and construction as the key indicators and determining factors for what lies ahead.

The market currently stands at a unique crossroads. With housing inventories across the nation at all time lows, and prices conversely on a steady climb, the routine turn-about is a rise in new construction.

The benefit of new home construction for the housing market is two-fold: It gives buyers an alternative to paying sky-high prices driven up by low inventory, and it helps replenish the market and balance out competition and overall valuations.

Recent reports and analysis do indicate a rebound in new construction, albeit a slight one. However, it’s not recovering as expected, nor quickly enough to provide balance to the low availability on the market.

One of the main reasons for the slow recovery of new construction is also throwing a wrench into the gears of many other aspects of the real estate industry: Tight lending practices.

We could argue that the banks responsible for housing loans are understandably justified in clenching their purse strings with a near superhuman grip after the turmoil endured just a handful of years back as the housing bubble burst.

You’d think an improving job market, an influx of buyers regaining confidence in real estate, and a whopping 20% drop in inventory in just one year would be enough to spur looser lending practices with banks and financing organizations. Yet the tight standards continue to push eager buyers out of the market – buyers who would likely put that money into new developments.

So what could be the cause of the stricter practices? Some analysts believe that banks are leaning on a “burn me twice, shame on me” mentality, leading to a reluctance rooted in over-exaggerated caution. Still others think that, with a good portion of buyers and investors paying cash for houses, and the scarce supply of homes, they simply have the luxury of scrutiny on every loan.

Let’s first be realistic about the relative state of the market before we get carried away, though. We’re still far from out of the woods. Although it is recovering, the market is nowhere near where it was in the boom from the early 2000’s. Home sales from a few months ago, while showing recovery, are still a stunning 60% lower than they were this time in 2006.

Perhaps the banks aren’t wearing the same new ‘rose colored glasses’ that everyone else in the housing market seems to be donning these days, and the realist view is keeping them vigilant. Whatever the reason, the housing market is indeed bouncing back, but it needs the banks to stop stifling growth, promote new construction and operate toward the collective goal of a successful recovery.

About the Author

Kamiel Moore is a blogger for HomeVestors, America’s #1 homebuyer. Check out our site today for any real estate needs!

photo by: torbakhopper

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