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Survey suggests some cooling in the housing market

In the latest quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, there was an increase in the number of domestic banks reporting weaker demand for home mortgages compared to the October survey.

The recent survey revealed that 52% of all bank respondents reported similar demand over the past three months compared to 59% in October. Also, 42% reported moderately weaker demand while nearly 32% were reporting that in October. In addition, 4% reported substantially weaker demand compared to zero percent in the previous survey. Trends were similar when broken out between large banks and other banks.

One factor contributing to the weaker demand was the increase in mortgage rates. For example, 30-year, fixed rates averaged 5.89% in the August-October period and 6.25% in the November-January period. During the six months, rates reached a low of 5.71% in September and a high of 6.37% in November.

Another factor may have been the tightening in bank credit standards. In the January SLO survey, 8% of respondents reported "tightening somewhat" over the three-month period, versus 5.6% in the previous survey. However, a significant number of banks responding said their standards were basically unchanged - 84% versus 85.2%.

Housing starts jump

Despite the lackluster numbers in the senior loan officer survey, housing starts reported for January were robust. The Commerce Department reported a huge increase in January housing starts, rising to 2.276 million units from 1.988 million units in December - the strongest reading since 1973, with single-family starts being at their highest ever. Most Street analysts attributed the jump in housing starts to favorable January weather compared to December.

However, RBS Greenwich Capital chief economist Stephen Stanley said the December figure was revised upward by 55,000 units. Taking the two-month average still results in a strong reading, which is 2.132 million units, or 3% above last year's average. Also, every region increased noticeably. The Northeast, Midwest and West all rebounded significantly from drops in December.

"Once again, it seems that the death of the housing market has been greatly exaggerated," Stanley said. "Don't get overly excited by these data, though. There has been cooling in housing demand, but we have been making two points all along that these figures underscore."

The first point is that housing activity is going to slowly moderate, but not collapse. Stanley said the underlying fundamentals - such as employment, income and historically low mortgage rates - are just too attractive for demand to significantly drop. Also, Stanley said that for some time, home sales are going to diminish sooner and comparatively more than construction activity, since builders have a great deal of order backlogs accumulated.

However, Stanley reported that some of the big builders have started to report higher cancellation rates and a slower pace of new orders.

Although, "what the doom-and-gloomers are ignoring about the industry color is that backlogs remain very large, and this will dictate continued strong construction spending [though not necessarily much growth at the margin] for some time, especially if the powers that be can ever get the New Orleans snarl sorted out so that homeowners down there can begin to rebuild," Stanley said.

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