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Small builders who have seen the availability of the credit they need to construct new homes slow to a trickle at their local community banks may have to wait a year or longer to see financing restored to more normal levels, according to an economist speaking at NAHB's Fall Construction Forecast Conference in Washington, D.C. on Oct. 21.
The state of the banking industry is better than expected considering everything the industry has gone through "and how scary it was at the beginning of the year" when the economy appeared to be on the brink of financial collapse, said Douglas Elliott, a Brookings Institution fellow.
The larger, national banks "are going to make it through this in significantly better shape than we would have thought six months ago," he said, and have been able to offset some of their loan losses by stepping up their core earnings.
However, smaller banks are exposed to possible "bad results" in commercial real estate, he said, which accounts for half of the lending at many of these institutions.
While not a major threat to the banking system, which has seen the assets of big banks grow from a two-thirds to three-fourths share of the industry over the past decade, it is having an impact on small business loans, Elliott said.
"The traditional banks small businesses go to are suffering badly," he said.
The mortgage-backed security market has also not started working as it should to support a full-fledged housing recovery, Elliott indicated, while the Federal Reserve appears to be getting ready to wind down its support. Banks won't be strong enough to hold enough mortgages in their own portfolios, he said, so securitization will have to come back, which will entail regaining the trust and interest of foreign investors.
Interest Rates Going Up
"Mortgage interest rates are definitely going up," said Jay Brinkman, chief economist at the Mortgage Bankers Association, as the Fed pulls out of the securities market. However, he said he expected the increase to be "benign," with an additional 20 to 30 basis points being required to bring traditional investors back into the market.
The Federal Reserve now holds about $1.5 trillion worth of these instruments, said Elliott, which will have a bearing on pricing for the players returning to the market.
Beyond the mortgage-backed securities issue, Brinkman said that housing has entered a "period of upward trending interest rates" against rising inflationary fears in response to the outsized share of debt that has been assumed by the federal government to shore up the economy. "The federal debt overhang going forward is very concerning," he said.
However, in response to a slowdown in the pace of recovery during the second half of 2010, Brinkman said he expected to see no increase in the currently near-zero federal funds rate next year.
Interest rates on 30-year, fixed-rate mortgages are heading higher, he said, not enough to hurt home purchases but enough to slow refinancing.
He predicted these mortgages would average 5.2% in next year's first quarter and rise gradually to 6.1% in the second half of 2011.
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