Is it time to give up on the housing recovery?

The Mortgage Bankers Association reported yesterday that mortgage credit improved again in May, with the MBA’s mortgage credit availability index jumping 1.14 percent from last month to 115.1. That’s good news for property developers and sellers, as tight lending standards have kept many potential home buyers on the sidelines. But new analysis from Bank of America suggests that other factors may prevent residential investment from returning to historical averages, at least in the near term.

In the report, analyst Michelle Meyer points out that the current number of  housing starts — one million — is well below traditional levels. While Meyer says that low number may not be “the new normal,”  she does suggest the return to more robust building may be a ways off.

Why? For starters,  there is a decline in the number of people moving out of cohabitation situations and becoming heads of households. That means fewer families are out there looking to buy homes. The good news is Bank of America sees this as a cyclical factor that will improve as the economy recovers.

Still, that weak household formation is one of the biggest challenges facing the housing market, said Jonathan Miller of real estate appraiser and consultant Miller Samuel.

“The simple fact is the housing situation that we’re in now is part of a long slow slog. Until you see credit normalize, which I think is several years out, you’re going to see weak home ownership rate, and not much improvement in household formation because student loan debt is still huge problem,” said Miller.

Slow household formation parallels another trend, one that Bank of America thinks is not cyclical, but structural: the shift toward renting rather than buying. Even as households form, many new heads of households are opting to rent rather than buy. And the economy just doesn’t get the same boost from multifamily construction as it does from single-family home building.

At the same time, Bank of America expects fewer homeowners to trade up to new homes. Mortgage rates have fallen recently, but are still well above their taper-induced lows of 3.4 percent. With multifamily building accounting for a greater share of overall construction, residential investment will likely fail to return to historic averages of 4.7 percent of GDP in the medium term, says Bank of America.

This trend toward renting is already well under way, and recent data suggest it is gaining steam. In April, housing starts surprised to the upside, jumping 13.2 percent from March, the fastest pace thus far this year. But that growth was driven by a 40 percent increase in multifamily building. Meanwhile, single-family home construction was up 0.8 percent.

Appraiser Miller expects this pattern to persist. He projects home ownership rates to slip another 1 to 2 percentage points, with about 1.7 million homeowners becoming renters. That, combined with the decision among new heads of households to rent, will spark a 23 percent increase in multifamily building this year, estimates the bank. It projects a 5 percent uptick in single-family construction.

Miller says the preference for home ownership has not changed, but tight credit is holding back buyers and making renting an economic necessity.

“When credit is historically tight, change happens,” said Miller.

At least in terms of home ownership, Miller does believe we’ll return to the historic norms. That, however, will take a period of years, not months, he said.