Trends Indicate Real Estate Lending Slowing

While loan growth continues to remain strong, there are several economic indicators that point to a slowdown in the real estate market.


U.S. house price quarterly appreciation rose 2.03 percent in the first quarter of 2006, the slowest growth rate since the first quarter of 2004 according to the House Price Index, produced by Office of Federal Housing Enterprise Oversight. However, the report indicates that house prices year-over-year rose 12.5 percent while non-housing goods and services that are tracked by the Consumer Price Index rose only 4.2 percent.

Credit unions enjoyed 10.5 percent 12-month loan growth as banks and thrifts reported 10.7 and 10.4 percent growth respectively as of March 31, 2006. Mortgage loan growth for the credit union industry slowed to 13.7 percent as of March 31, 2006 from 15.4 percent a year ago. The average first mortgage loan grew 6.2 percent to $109,025, and many credit unions, particularly on the coasts, have approved jumbo mortgages that are above the 2006 conforming loan limit of $417,000. Housing is still a strong market but is showing multiple signs of slowing down.

There are a few macroeconomic indicators reported by the Commerce Department that indicate the trend:

  1. Privately-owned housing starts fell 7.4 percent in April 2006 from the revised March 2006 estimate to a seasonally adjusted annual rate ( SAAR) of 1.849 million units. Furthermore, privately-owned housing starts are down 11.1 percent from April 2005.
  2. New-home construction year-to-date through April 2006 fell 0.8 percent from the first four months of 2005.
  3. The issuance of building permits declined 5.4 percent in April 2006 to a SAAR of 1.984 million units. That is 8.0 percent below the April 2005 estimate of 2.156 million units.

Other factors such as home sales volume and median home prices tell a similar story. While new home sales increased 13.8 percent in March 2006 to a SAAR of 1.21 million units according to the Mortgage Bankers Association, year-to-date sales were 7.3 percent below the first three months of last year. Meanwhile, the number of new homes available for sale increased 25.4 percent to 555,000 units. That represents a 5.5 month (inventory/sales) supply for both new and existing homes, which is up from 4.2 months as of March 2005. The increase in homes available for sale could come as a result of speculative investors putting their houses on the market to take out their profits.

While potential borrowers are expressing relief that home price appreciation is returning to moderate levels, home builders are increasingly conveying a more negative view of homebuilding conditions. The National Association of Home Builders (NAHB) surveys homebuilders on a monthly basis for its seasonally adjusted Housing Market Index. The Index fell in May 2006 to a reading of 45 from 70 a year ago, which means that over half of the group is pessimistic about homebuilding conditions. That represents the lowest confidence level since 1995, with the exception of the two months following 9/11.

The homeowner vacancy rate helps to explain the homebuilders’ concern. It rose to 2.1 percent as of the first quarter of 2006 from 1.8 percent a year ago according to the U.S. Census Bureau. The rate is at its highest level since the U.S. Census Bureau starting tracking the statistic in 1994. The industry is clearly building homes faster than consumers can purchase them, signifying that the recent rash of new building should slow in the next year.

In comparison, the rental vacancy rate actually declined to 9.5 percent as of the first quarter of 2006 from 10.1 percent a year ago. While the homeowner vacancy rate has steadily increased, the rental vacancy rate has steadily decreased, as more potential borrowers are renting for a longer period before purchasing their first house. According to the National Association of Realtors, half of first-time home buyers are 32 or older. The median age could rise if the homeowner vacancy rate continues to increase.

For more information on first quarter trends, please click here to preorder Callahan & Associates’ 1 st Quarter Report.




June 5, 2006


  • Very informative....put's on call that we need to utilize our resources of networking more frequently with our builders and realtors.