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the latest ORIGINATION Or ig i nat ion July Construction Spending Increases Expenditures on homebuilding continue to tick up. Prepayment rates remain on par with last year, when mortgage rates were bottoming out. O riginations slowed slightly from May to June, though heightened prepayment activity is still providing lift to loan volume, Lender Processing Services (LPS) reported in its July Mortgage Monitor. According to Herb Blecher, SVP of LPS Data & Analytics, prepayment activity (usually a good indicator of refinances) has taken a hit from the recent sharp increase in interest rates. Despite the decline, however, the monthly prepayment rate as of July was 1.78 percent—about on par with where it was the same time last year, when mortgage rates were at historic lows. "In fact, [prepayment rates] are roughly at the same levels as the heights of the 'mini refinance booms' in 2010—when interest rates were comparable to where they are today—and in 2009, when rates were even higher," Blecher said. "Of course, as interest rates continue to climb, we can expect that both prepayments and associated originations will decline." Notable, Blecher added, is the fact that prepayment activity in July increased among higher loan-to-value (LTV) mortgages, especially those with LTVs of 100 percent or more—indicating continued strength in Home Affordable Refinance Program (HARP) activity. Builders aren't finding suitable places to break ground. A s the market trudges toward recovery, housing starts remain depressed due to a shortage of vacant lots, according to the National Association of Home Builders (NAHB). Housing starts reached an annual rate of 900,000 in the latest Census data, which while up from a low of 550,000 in 2009 is still below the historic average of 1.5 million maintained from 1960 to 2000. "Lot shortages are one of several barriers that have arisen, restraining builders from responding completely to increased demand," said David Crowe, chief economist for NAHB. In an August survey, the NAHB found that 59 percent of builders say the supply of lots in their area is either "low" or "very low." The 59 percent marks a high for the monthly survey, which began in 1997. "One reason is that many residential developers left the industry, abandoned certain markets, or simply stopped buying land and developing lots during the downturn," Crowe said. A minority, about 14 percent of builders, said there is a "high" or "very high" supply of lots in their area, according to the NAHB survey. The shortage of lots is apparently greater among more desirable lots, according to survey results. Thirty-four percent of survey respondents said the supply of the most desirable lots is "very low," while only 12 percent of respondents said the least desirable lots are in "very low" supply. These lot shortages translate to higher prices, which are passed on to homebuyers, according to NAHB. "There is still a substantial pentup demand for housing waiting to be unleashed as the overall economy and labor situation improves," Crowe said. However, lot shortages, along with other obstacles, including "a shortage of labor in carpentry and other key building trades, limited availability of loans even for credit-worthy homebuilders and homebuyers; and, more recently, an uptick in interest rates," may deter some momentum in the housing recovery for the time being, according to NAHB. The M Report | 41 se c on da r y m a r k e t Prepayments Strong Despite Interest Rate Hikes NAHB: Lot Shortages Holding Back Recovery a na ly t ic s billion, up 0.5 percent from June and 16.8 percent from July 2012. On the private side, residential construction spending increased 0.6 percent to an estimated annual rate of $334.6 billion. Construction for single-family homes was a rate of $168.2 billion (up 0.5 percent monthover-month), while construction on multifamily dwellings was at a rate of $31.9 billion (up 0.1 percent). In the public sector, residential construction spending was at an estimated annual rate of $6 billion, a 3.1 percent drop from June and a 2.4 percent decline from last year. s e r v ic i ng R esidential construction spending edged up in July, according to numbers from the Census Bureau. Overall, construction spending was at a seasonally adjusted annual pace of $900.8 billion in July, 0.6 percent above June's revised estimate of $895.7 billion and 5.2 percent ahead of July 2012's $856.3 billion. For the first seven months of the year, construction spending amounted to $493.9 billion, 5.6 percent above the same period in 2012. Spending on residential construction was at a pace of $340.6