Tag Archives: Freddie Mac

JCHS: Despite Rising Home Prices, Homeownership More Affordable than Ever

Despite Rising Home Prices, Homeownership More Affordable than Ever

 by Rocio Sanchez-Moyano
Research Assistant
For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains.  Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively.  In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.

The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases.  Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income.  Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012.  Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer.  In fact, the cost of a nationally median-priced home would have to increase by more than 56.7 percent to become unaffordable at the median household income.  Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate.  For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.

Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers.  In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012.  For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable.  The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordabilityindex. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last.  Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to thePrimary Mortgage Market Survey issued by Freddie Mac.  Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.


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JCHS: Spending on Distressed Properties Boosts Remodeling

Spending on Distressed Properties Boosts Remodeling

 by Elizabeth
La Jeunesse
Research Assistant
In recent years, a sizable inventory of distressed residential properties in the U.S. housing market has begun to drive up spending on home improvements and repairs. According to a new Joint Center research note, the market for home improvement and repair spending to distressed properties in 2011 was approximately $9.8 billion. Around four-fifths of this estimate ($8.1 billion) was spent by households and investors on homes purchased after short sale, homeowner default, or bank foreclosure. One fifth of this estimate ($1.7 billion) was spent by banks and institutions to prepare REO (real estate owned) homes for sale.


Note: Bank-owned distressed properties include those sold by Fannie Mae, Freddie Mac, FHA or private banks.  Source: JCHS, N13-1, Home Improvement Spending on Distressed Properties

According to our estimates, from 2007 to 2011, annual spending to distressed properties saw an increase of nearly $6.7 billion. As a share of all home improvements and repairs by owners, spending on distressed properties grew from just 1% in 2007 to 4% in 2011. While much of this spending follows a period of under-investment as properties sat vacant through the foreclosure process, more recently additional funds are being spent to get these homes back into active stock.

According to a 2012 Federal Reserve White Paper, the flow of new REO homes should remain high in 2012 and 2013. If this prediction bears out, then the level of repair and improvement spending to distressed properties in the next two years should remain roughly similar to the nearly $10 billion levels reached in 2011.

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U.S. Housing And Residential Mortgage Finance 2013 Outlook: Homebuilders Benefit From Demand For New Homes

U.S. Housing And Residential Mortgage Finance 2013 Outlook: Homebuilders Benefit From Demand For New Homes

Senior Director, Structured Finance
Standard & Poor’s Ratings Services

Buyers for newer homes returned to the single-family home market in 2012, resulting in better than expected operating results for most of the homebuilders we rate. Sales volumes and average selling price exceeded our initial expectations, and we currently expect that the homebuilders we rate will deliver on average 20% more homes in 2012 compared with 2011. Most new homebuilders have also posted healthy increases in average selling prices, outpacing overall market trends, as buyers gravitated toward competitively positioned new home communities and the supply of existing homes for sale has remained very low.

Despite our expectation that favorable housing demand and supply fundamentals will continue to support strong revenue and EBITDA growth in 2013, our outlook on the homebuilding sector remains stable. Improved fundamentals reduce downside risk in our view, particularly for the lowest rated companies, but we expect upside rating momentum will likely be more muted as homebuilders draw down their sizable cash balances (a primary support to liquidity over the past few years), and raise additional debt capital for future land and inventory investment in anticipation of higher sales volumes. The effect of this additional debt issuance will likely slow the leverage improvements necessary for more positive rating actions over the next 12 months.

We also remain concerned that the impact of a potential recession in the U.S. would be more significant for homebuilders than many other sectors, since a drop in consumer confidence would likely derail buyers’ appetite for large discretionary purchases such as single-family homes. In addition, decisions on numerous regulatory and policy initiatives that would have an impact on housing are slated for the first half of 2013, many of which could significantly affect the availability and cost of mortgage financing.


The mortgage insurance sector continued to experience losses stemming from their legacy portfolios in 2012, leading to reserve adjustments and higher expected losses from delinquency to claim. Despite the reserve adjustments mortgage insurers have taken, reserve adequacy remains a significant risk, particularly given the capital impairment of many of the mortgage insurers remaining. We expect losses to continue through 2013 into 2014, although new notices of default should continue to trend downward barring a setback in the economy or housing markets.

Regulatory risk also remains heightened. Many of the mortgage insurers are operating under capital waivers from state insurance regulators allowing them to continue writing new business. Despite the ongoing depletion of capital, however, there appears to be little appetite on the part of either the state insurance regulators or the GSEs to discontinue allowing new business writings or accept the mortgage insurance paper from a counterparty perspective. Indeed, moves by Freddie Mac toward settling a dispute with Mortgage Guaranty Insurance Corporation (MGIC), acceptance of a voluntary runoff plan with higher claim payments for Republic Mortgage Insurance Co. by the North Carolina Department of Insurance, and permitted practices that the Wisconsin Office of the Commissioner of Insurance has allowed appear to be indicative of a shift toward greater accommodation.

We expect the very high credit quality of new insurance being written, combined with improvement in the housing markets and economy, to result in this business being profitable and capital accretive. Nevertheless, significant risks to the economic recovery remain. Should a recession occur in 2013, the declining trend of new notices of default could reverse and claim frequency could increase to an extent that could force several mortgage insurers into regulatory supervision and voluntary run-off.


Fannie Mae and Freddie Mac remain vital cogs in U.S. mortgage finance. The two combined to guarantee roughly 70% of new mortgages in the U.S. through the first nine months of 2012 and are effectively providing market liquidity at a time when private capital remains scarce. They continue to receive the financial support of the U.S. Treasury, and the Federal Reserve has committed to buying $40 billion of their mortgage-backed securities each month until economic conditions improve, meaning rates should stay low. Their financial results have improved because new loan loss provisions have declined, in line with their falling delinquencies, but potential losses within their single-family guarantee portfolios remain substantial. We believe the September 2012 amendments to their investment agreements with the U.S. Treasury ensure that sufficient financial support for these entities remains in place for the foreseeable future, which means they will be able to continue to support the U.S. housing recovery in 2013.


For more than a decade, U.S. public finance issuers have faced increasing competition from commercial lenders for the first-time low- to moderate-income homebuyers they traditionally serve. Competitive mortgage products and persistent low interest rates have caused many U.S. housing finance agencies (HFAs) to use variable-rate debt, coupled with hedges and other structures, to enable them to actively issue bonds while maintaining competitively low rates. Because HFAs’ mission is to provide affordable housing options for low- to moderate-income families, some of these issuers have searched for alternatives to mortgage revenue bonds for financing loans and have used these methods more increasingly in 2012.

We found that these issuers are using a variety of mortgage product options to fund their programs. These options include mortgage-backed securities (MBS) to the “to be announced” (TBA) market, the forward trade of Ginnie Mae issued MBS that guarantee HFA originated mortgages with delivery of the MBS to the market investor prior to the established trade settlement date, and direct purchase loan participation pool sales to financial institutions. In addition, HFAs are originating home mortgages under their guidelines, insured by the federal government under the Federal Housing Administration (FHA), and selling them directly to financial institutions. They are also originating whole loan HFA program guidelines and selling directly to GSEs (Fannie Mae or Freddie Mac) for cash.

The investors in the HFAs’ alternative funding products vary. Fannie Mae and Freddie Mac purchase whole loans directly from the HFAs through various programs that include recourse to the HFA during the earlier part of the loan’s term. Market activity suggests that insurance companies, individual investors, and some institutional investors (through brokers) are purchasing MBS through the TBA market. We expect this shift in mortgage funding among HFA issuers to prevail in 2013 and over the long term. While direct sales of loans to the GSEs remain a viable alternative for the HFAs, the agencies’ receivership status may impair their long-term capacity to purchase whole loans. As the U.S. public housing sector continues to evolve, HFAs’ ability to identify and use alternative sources for mortgage funding, while also recognizing and mitigating the risks of these alternative options, will be critical to their credit strength and, ultimately, to their sustainability over time.

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JCHS: More Working Americans Struggling to Afford Housing

More Working Americans Struggling to Afford Housing

by Eric Belsky

Managing Director
With growth in incomes lagging growth in housing and utility costs, the share of Americans spending large sums of their income on housing has climbed nearly uninterrupted for decades.  But the Great Recession has taken an especially heavy toll, as millions of families have slipped down the income scale due to job loss or curtailment of hours. Indeed, while households with incomes under $15,000 made up only 12 percent of all households in 2001, they made up 40 percent of the net growth in the number of households over the past ten years. Faced with reduced incomes, some of these households have moved so that they can save on housing costs but many others are instead stretching to make their rent or mortgage payments.As shown in Figure 1, even households with incomes above $15,000 (slightly above the equivalent of full-time work at minimum wage) are finding it harder to keep up with housing costs.  Fully 64 percent of all households with incomes in the $15,000-$30,000 range are housing cost burdened, spending 30 percent of their income on housing and utilities. Among those with incomes of $30,000-45,000, a smaller but still substantial 42 percent are cost burdened, while more than a quarter of those with incomes in the $45,000-$60,000 range are cost burdened. These shares are each up over seven percentage points across all three of these income bands in just the past ten years.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Cost-burdened households spend more than 30% of pre-tax household income on housing costs. 

Source: JCHS tabulations of US Census Bureau, American Community Surveys.

Renters and owners are both experiencing rising housing cost burdens. On the rental side, the share of renters with cost burdens has doubled, from a quarter in 1960 to a half in 2011, while the share with severe cost burdens (spending more than half their income on housing and utilities) shot up from 11 percent to 28 percent over that period, spiking in the last decade. Renters with incomes of $15,000-$30,000 who have severe cost burdens climbed from 2.0 million in 2001 to 3.2 million in 2011, and those with incomes of $30,000-$45,000 doubled from 300,000 to 600,000.

Cost burdens have also reached record highs for homeowners. Among homeowners under age 65, 39 percent of those earning one to two times the minimum wage and 18 percent of those earning two to three times the minimum wage are now severely housing cost burdened.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Severe housing cost burdens are households who spend more than 50% of pre-tax household income on housing costs. 

Source: JCHS tabulations of US Census Bureau, American Community Surveys.

There is an irony to the situation of homeowners: millions of them can’t take advantage of today’s low rates to lower their housing costs because their homes are worth less than they owe on their mortgages. Despite many federal efforts to ease the path to refinancing for such owners, it remains blocked for large shares of them.  Those who have loans not endorsed by FHA, Fannie Mae, or Freddie Mac are out of luck.  And for those with loans endorsed by these agencies, they may still not meet credit score, debt-to-income ratio, and documentation requirements for refinancing.  Even if existing owners can refinance, loss of an earner or curtailment in hours may result in payments that still stretch them thin.

These affordability problems are not likely to abate any time soon.  Rents are back on the rise, and in many areas sharply. Incomes remain under pressure from high unemployment rates and an ongoing shift in the composition of jobs to lower paying work, where entry-level workers in many key occupations are priced out of affordably covering their housing costs. For example, two-thirds of households that include a retail worker in the lowest wage quartile for that occupation are severely cost burdened, along with seven in ten of those including a childcare worker in the lowest wage quartile for that occupation.

Meanwhile a golden moment is being missed to place people into homeownership at record low interest rates.  Additionally, home prices have fallen by about a third nationally, and by much more in many places. As a result, relative to renting, the cost of owning a home for first-time buyers has not been as favorable for at least 40 years, on average, nationally. But lenders are reluctant to lend, fearful of the impact of new regulations and that they will have to buy back poorly performing loans. As a result, many would-be homebuyers are missing a chance to lower their payments relative to today’s rents and also to lock in their mortgage costs with extraordinarily low fixed-rate loans.

Having so many Americans spend so much on housing is a concern not just for those affected. Housing cost burdens affect the national economy, leaving less to spend on other items and making it harder for Americans to save for the future.  As an example, families with children in the bottom quarter of spenders with housing and utility payments of more than half of total outlays spent a third as much on healthcare, half as much on clothes, and two thirds as much on both food and pension and insurance as those with housing outlays of less than 30 percent. In retirement, more will be entitled to programs like Medicaid, placing strains on social service systems.

Note: Low-Income families with children are those in the bottom expenditure quartile. Severely cost burdened households spend over half of all expenditures on housing; unburdened households spend less than 30 percent.   

Source: JCHS tabulations of the Bureau of Labor Statistics, Consumer Expenditure Survey.

Hemmed in by budget pressures and the enormity of the problem, our political leaders have done little to forestall or address growing housing affordability problems. Federal programs are costly and also have limited reach. Indeed, only about a quarter of all renters eligible for housing assistance (those earning half or less local area median incomes) receive it and there is essentially no comparable program to help struggling homeowners apart from a very small, temporary, emergency program put in place in 2010.

Still, some places at least, have found ways to reduce housing costs in their areas through regulations and land use policies that do not involve taxpayer subsidies or tax incentives.  These include some cities that are relaxing minimum unit-size requirements to encourage production of small micro-units of only a few hundred square feet.  Others with markets strong enough have been offering density bonuses to encourage set-asides of affordable housing units in new construction projects.  Yet most local governments continue to restrict residential densities.  Lenders, meanwhile, are so cautious after having so badly missed the mark with their lending standards that many who could lock in today’s low home prices and record low rates are unable to do so.

Americans will face daunting housing cost burdens that thwart savings and sap spending on non-housing items until: 1) lenders ease standards back to reasonable levels, 2) homebuilders are freed of barriers preventing them from building at greater densities, and 3) governments provide greater tax incentives or subsidies to close the gap for more low and moderate-income households between what they can afford and the costs of market-rate housing.


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Lawler: Single Family REO inventories down 21.7% in Q3

Lawler: Single Family REO inventories down 21.7% in Q3

by Bill McBride on 12/04/2012 

The following graph is from economist Tom Lawler and shows the total REO for Fannie, Freddie, FHA, Private Label (PLS) and FDIC insured institutions. This isn’t all the REO, as Lawler noted before, it “excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts”, but it is probably over 90%.

From Tom Lawler:

On the SF REO front, the [FDIC insured] industry’s “carrying value” of 1-4 family REO properties at the end of September was $8.7663 billion, down from 8.0% on the quarter and down 26.3% from a year ago. The FDIC neither reports on nor collects data on the number of 1-4 family REO properties held by FDIC-insured institutions, which is annoying. Assuming that the average carrying value of 1-4 family properties at such institutions is 50% higher than the average for Fannie and Freddie (which seems broadly consistently with other data sources on average UPB balances), then a chart showing SF REO inventories of Fannie, Freddie, FHA, private-label securities, and FDIC-insured institution would look as follows.

Total REOClick on graph for larger image.

SF REO inventories for these combined sectors in September were down 21.7% from last September.

CR Note: There are still quite a few properties with loans 90+ days delinquent or in the foreclosure process, but it appears these institutions are working down the number of foreclosed properties they are holding.

Read more at http://www.calculatedriskblog.com/2012/12/lawler-single-family-reo-inventories.html#UCWXvQXZ2IlVSvDC.99

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Read of the Day: Hidden Housing Subsidy May Soon Come Out Of Hiding

Hidden Housing Subsidy May Soon Come Out Of Hiding


November 16, 2012

The federal government has all these ways of paying people to buy houses without actually, you know, paying people to buy houses.

We’ve talked a lot about two examples of this:

1. The mortgage-interest tax deduction is effectively a government payment to people who are paying a mortgage.

2. Fannie Mae and Freddie Mac allow home buyers to get below-market-rate mortgages. They blew up in the housing bust, requiring a massive federal bailout.

We haven’t talked so much about a third example of a federal housing subsidy that doesn’t seem like a subsidy: the Federal Housing Administration, aka FHA.

Like Fannie and Freddie before the housing crisis, FHA has always funded itself. And, like Fannie and Freddie after the crisis, FHA may soon need a taxpayer bailout. An audit of FHA released today found that the agency is $16 billion in the hole.

The FHA doesn’t actually make loans. It guarantees them. If you get an FHA-backed mortgage and don’t pay it back, the FHA has to make up the difference. The FHA requires everyone who gets an FHA loan to buy insurance, which is supposed to cover losses when borrowers default.

But the system only works if the FHA prices the insurance correctly. And it appears that, during the early part of the housing bust, the FHA did not collect enough in premiums to pay off losses it will incur in the coming years.

The trouble is likely to come from loans made in 2008 and 2009. At that time, it became increasingly difficult to get a private loan. So more and more borrowers turned to FHA-backed loans, and the agency wound up backing hundreds of billions of dollars in mortgages.

On top of that, FHA loans require only a tiny down payment — as little as 3.5 percent. As a result, when housing prices decline, borrowers very quickly end up owing more than their home is worth. This dramatically raises the risk of default.

The agency has been raising the premiums it charges, among other steps, to try to fix the problem. But today’s audit suggests that those steps haven’t plugged the hole. FHA will probably need taxpayer money to make good on the promises it made as the housing market was collapsing.

FHA-backed mortgages

Source: Inside Mortgage Finance

Credit: Lam Thuy Vo

Update: FHA today announced several new steps it’s taking to try to plug the hole in its finances. Details here.

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NAHB Fall Construction Forecast

NAHB Fall Construction Forecast

by David Crowe — Eye on Housing

Sparked by rising home prices across much of the nation, the housing recovery is now under way, but fiscal uncertainties and other challenges could result in a bumpy ride in the coming months, according to economists participating in yesterday’s National Association of Home Builders (NAHB) webinar on the construction and economic outlook.

“We’re seeing a more robust housing sector than many other parts of the economy,” said NAHB Chief Economist David Crowe. “One of the reasons is we have finally begun to see on a national scale that house prices are picking up again.”

Crowe cited a number of other factors that are carrying the housing momentum forward. These include:

·     Pent-up household formations

·     Rising consumer confidence

·     Increasing builder confidence in all three legs of the industry: remodeling, multifamily and single-family construction

·     Growing rental demand

·     More than 100 metros currently on the NAHB/First American Improving Markets Index

However, Crowe offered several cautionary factors that continue to put a drag on housing activity at this time – including builders who are experiencing difficulties in obtaining production credit, qualified buyers who are unable to obtain mortgage loans, inaccurate appraisals, seriously delinquent mortgages that are at least 90 days late or in foreclosure, and a limited inventory of developed lots in certain markets.

Other causes contributing to uncertainty in the marketplace include the looming “fiscal cliff” that will trigger mandatory budget cuts and tax increases at the beginning of next year, pending Dodd-Frank Act regulations that are making financial institutions hesitant to lend since they don’t know how the new rules will affect them, tax reform, and the future role of Fannie Mae and Freddie Mac in the nation’s housing finance system.

NAHB is forecasting a 21 percent increase in single-family starts this year to 528,000 units and a further 26 percent climb to 665,000 units in 2013.

Multifamily housing starts are expected to rise 26 percent this year to 224,000 units and 6 percent in 2013 to 238,000 units.

Expressing a more bullish outlook on housing and economic growth, Mark Zandi, chief economist for Moody’s Analytics, forecast that GDP growth will range in the 2 percent range this year and next and “double that growth closer to 4 percent in 2014 and 2015.” At the same time, he expects job growth to go from two million per year to closer to 3 million in 2014 and 2015.

“A big part of this optimism is the housing market,” said Zandi. “I expect 1.1 million total housing starts in 2013, 1.7 million to 1.8 million in 2014 and over 1.8 million in 2015.”

Zandi noted a range of assumptions behind this rosy forecast, including the expectation that mortgage rates would remain very low, the availability of housing credit will improve as private mortgage lending begins to pick up, and the job market gains traction as policymakers work to resolve fiscal issues, which will ease market uncertainties.

Specifically, Zandi cited three critical fiscal policy concerns:

·     The fiscal cliff. If policymakers do nothing, the combination of pending tax increases and spending cuts set to take effect in January could produce a fiscal drag of four percentage points, Zandi said, which would throw the economy back into recession. “Hiring will remain weak until this is resolved,” he said.

·     Treasury debt ceiling. By late February or early March, the Treasury is expected to hit its debt ceiling. A failure to raise the ceiling would prevent the U.S. government to borrow to meet its existing legal obligations, including the issuance of monthly Social Security checks.

·     Achieve fiscal sustainability. Zandi said that federal government expenditures as a percentage of GDP is 24 percent and revenues is 17 percent. He said this seven-point gap needs to be slashed to closer to two percentage points of GDP. “We need spending cuts and tax revenues to narrow future deficits,” he said. “If we can’t do that, bad things will happen.”

Acknowledging that these challenges won’t be easy, Zandi said his forecast is based on the assumption that Democrats and Republicans will eventually strike a deal on these contentious issues because each side has much to lose. Democrats, he said, don’t want to see tax cuts for the wealthiest Americans and Republicans don’t like the defense cuts mandated by sequestration.

If the nation has the “political will to address the fiscal issues in a reasonable way, I think we will be off and running,” said Zandi.

Delving into the state statistics behind the national numbers, Robert Denk, NAHB’s assistant vice president for forecasting and analysis, cited a range of differences among the states in the amount of pain suffered during the recession and the progress that is being made in recovering.

The hardest hit states — such as Arizona, Florida, California and Nevada — bottomed out the furthest during the downturn and still have much ground to make up.

Meanwhile, several energy producing states – North Dakota, Texas, Oklahoma, Montana and Wyoming – will be back to normal levels of housing production by the end of 2014.

On a national basis, housing starts are projected to get back to 55 percent of normal production by the end of next year and 70 percent of normal by the end of 2014, Denk said.

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