Construction of new homes and apartments increased by over 17% in May compared to a month earlier and led to a feeling that we may have hit the bottom in the housing market. It represents the third straight monthly increase. Building permits also saw a 4% jump between April and May. These numbers are great in a vacuum, but if we look at housing starts historically, they’re not quite as exciting.

The May 2009 number was reported at an annualized rate of 532,000 units. In May of 2008, housing starts were reported at an annualized rate of 975,000 units. A year earlier in 2007, we were talking about 1.4 million units. So the number is great compared to where we’ve been recently, but the housing market still has a long way to go. There are three obstacles standing between the housing market and recovery right now.

First, homebuyers are running out of time if they want to take advantage of the $8000 tax credit for first time homebuyers. This credit is only offered through November of this year, so many of the potential homeowners out there are going to have less incentive to buy in a few short months.

Second, interest rates are marching higher. For several months, borrowers with good credit and solid income could get a fixed mortgage at a rate lower than 5%. Current mortgage rates are closer to 5.5% and they’re poised to continue increasing. This rise in rates will scare buyers that are on the fence away from home ownership.

Finally, in order for builders to continue building, they need to be able to stay in business and get loans themselves. Both of those areas are challenging for homebuilders right now, many of whom are sitting on mountains of unsold inventory and slashing prices across the board. A builder confidence survey was recently taken and a score above 50 in the survey represents optimism among homebuilders about the housing market. The most recent number released was actually down a point to 15, far from optimistic.

The housing market may have hit the bottom at some point over the past few months, but it’s not likely to recover as rapidly as many homebuilders need it to, especially with the economic headwinds they’re working against.

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Tags: Homebuilders, Loans, mortgage rates, tax credit

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