by Calculated Risk on 10/07/2014 01:22:00 PM

A few excerpts from a research note by Goldman Sachs economist David Mericle Housing: The Recovery Resumes

Overall, the message from the broad housing data flow is consistent with the national accounts data. Real residential investment grew at an 8.8% rate in Q2 and is tracking at nearly 15% in Q3. But how confident can we be that the recent turnaround will be sustained?

We continue to see substantial upside for the housing sector in the long run. This view is driven by the large gap between the current annual run rate of housing starts, which have averaged about 1 million over the last three months, and our housing analysts' projection of a long-run equilibrium demand for new homes of about 1.5-1.6 million per year, estimated as the sum of trend household formation and demolition of existing homes.

The question in the near term is how quickly and reliably that gap will close. Two factors are essential for the outlook:

1. Housing affordability. The first key factor is potential homeowners' ability to finance a mortgage. ... The index worsened last year as mortgage rates rose, but continues to point to a modestly higher level of affordability than usual. In addition, the recent data are encouraging ...

2. Mortgage credit availability. The second key factor is mortgage lending standards ... tight mortgage lending standards have been an obstacle to the housing sector's recovery, a concern frequently highlighted by Fed Chair Janet Yellen. But lending standards have shown some gradual easing in recent years, and the sudden easing in standards on prime mortgages reported in the Fed's Q3 Senior Loan Officer Opinion Survey is an encouraging sign.

On mortgage credit, an interesting article from Trey Garrison at HousingWire: Is mortgage credit loosening or not?

The Federal Reserve Board's Quarterly Senior Loan Officer Survey of credit conditions indicates that mortgage credit loosened in Q2 2014.

BofA Merrill Lynch Global Research score trends of actual purchase mortgages closed on a monthly basis, and they find the opposite is true: aggregate FICO scores for purchase mortgages continue to move higher.

“We think the explanation of the difference is that while FICO trends are lower in all financing channels (such as conventional or government), the highest quality channels are increasing share of mortgages closed, hence the aggregate score is rising,” BAML analysts say.

CR Note: Eventually mortgage credit will loosen, and that will be a positive for housing.