Anyone with a “For Sale” sign planted in the front lawn this summer faces a triple-whammy of tighter lending standards, an increasing supply of unsold homes and skittish buyers willing to wait for lower prices, according to a national housing study released last month.

Those three factors weigh heavily against hopes of a real estate recovery, says the Harvard University Joint Center for Housing Studies latest annual report. According to the group’s data-crunching, single-family housing starts fell 15 percent last year. However, by the end of the fourth quarter, those starts were 30 percent below peak 2005 levels - nearly matching the country’s last housing peak-to-trough drop between 1986 and 1991. Even manufactured homes were at their lowest levels in 32 years.

The drop in homebuilding was so great that the center says it chopped a full percentage point off national economic growth in the latter half of 2006.

However, a remodeling study released by the same think tank earlier this year may have more news value to the average PM reader.

“Existing home sales are an important driver of remodeling activity,” said the remodeling report released last February, “with sellers of older properties typically making improvement before putting their homes on the market and recent buyers typically making changes to customize their new homes to their tastes.”

While most PM subscribers don’t make a living catering to new residential construction, plenty do earn their livelihoods on remodeling. Taking the two reports together, and you can see how the misfortunes of one affect the fortunes of the other.

Despite the increasing bad news on the housing front, the current housing study says homes prices have yet to fall much overall and, as a result, many homeowners continued to tap home equity for home improvements last year. In its remodeling study, the center said the remodeling market was rapidly approaching $300 billion a year, climbing at a compounded annual rate of about 3.7 percent through 2015.

“The tendency of owners to spend more when home prices are rising … remained a plus for the economy in 2006,” said the June housing study. “Indeed, the amount of home equity cashed out set a record, even though the volume of refinances dropped off sharply. The potential impact of the housing slowdown on consumer and remodeling spending has, therefore, yet to hit.”

The typical lag between a retreat in new construction and a cutback in improvement spending is about six months, according to the report. For example, homeowners spent $228 billion on home improvement last year, up $6.2 billion from 2005. Meanwhile, spending on new construction dropped by $28 billion last year.

“Given the enormous amount of equity cashed out in 2006, the lag may be longer this time around,” the report said. “At some point, however, higher borrowing costs and weaker house prices will cause some homeowners to forgo or at least defer discretionary projects.”

In the last housing downturn, the housing study added that remodeling expenditures fell almost 9 percent in real terms between 1987 and 1991, while new construction spending plunged 33 percent in the same period.

Still, there’s much more to that statistic than meets the eye.

“However, spending on major improvement projects, like room additions and kitchen and bath remodels, did tumble nearly as much as new construction in the last downturn,” the housing report stated. “Indeed, it was spending on replacements of worn-out systems that kept total remodeling expenditures from falling more.”

There were plenty of warning signs about remodeling spending even as the group was putting the finishing touches on its remodeling study.

“As the housing market correction has progressed, many potential remodeling projects, like many home purchases, are being deferred until local house prices hit bottom,” the researchers wrote last February.

The quote underscores the natural importance of one of the factors still to be decided in the housing recovery - getting the “right” price. While falling prices discourage sellers, they discourage buyers maybe even more, with many more than happy to let falling prices fall some more. The housing report covers this and plenty of other ground, and you can download a free copy of both reports at 

For now, let’s just take a look at how tighter lending practices may affect current buyers and sellers.

Tighter Lending: If sellers and buyers both spruce up their homes before and after a sale, what happens when there are a whole lot less buyers shopping today? Easy credit practices and exotic mortgages helped fuel much of the recent buying binge for housing. Low teaser rates, little if any income documentation demands and payment options qualified more borrowers than ever. The low initial payments also helped more people buy as prices of homes went higher and higher.

“A rare combination of unusually favorable economic conditions and mortgage innovations was responsible for the exceptional growth of homeowners in the latter half of the 1990s and first half of the 2000s,” the report says.

However, many of these options are less likely to help now as the financial industry just begins to contend with rising defaults from these innovations. Many buyers that would have easily qualified from financing last year are now finding that they have to actually show a W2 form and may even have to make a down payment first.

Page through the study’s coverage on financing home sales and you’ll realize you’re more likely to spot a guy wearing a straw boater at a ball game than you are to meet someone with a 30-year fixed rate mortgage.

Subprime loans, which no one had even heard of until recently, accounted for 20 percent of loan originations last year.

Interest-only mortgages and financing with flexible payment options went from less than 5 percent of all originations in early 2002 to as much as 38 percent in mid-2005. It currently accounts for 32 percent.

Adjustable rate mortgages also gained market share, increasing from 13 percent of origination in 2003 to 35 percent in 2005.

Federal Housing Administration loans, once the only place for nonprime borrowers, accounted for only 2.7 percent of originations last year.

All these various loans were based on essentially the same gamble: enjoy low payments today, but face higher - and exactly how much higher nobody could say - payments in the future. Such a bet wasn’t too risky when homes were appreciating double-digits every year as they were for much of the new century. Borrowers could always sell for a profit or count on rising equity to make refinancing a snap. But those days are definitely done for. Meanwhile, the lower teaser rates are all resetting and borrowers are beginning to realize just how expensive owning a home can be.

Fully indexed adjustable rates, for example, went from 4 percent in 2003 to 8 percent last year. Three-quarters of borrowers with payment-option loans, which essentially function like minimum payments due on credit cards, are currently only making minimum payments, thus adding to rather than paying down any part of the principal.

“As the first wave of these loans begins to reach their reset dates,” the study says, “the signs are not encouraging.”

The report notes that the share of subprime loans originated in 2000 and foreclosed upon as of May 2005 was 13 percent - and that’s even with falling interest rates between 2000 and 2003 and rising home prices since 2000.

More recent subprime loans are expected to default at higher rates. Data from just last May showed that 7 percent of subprime, adjustable rate loans made only last year were already at least 60 days delinquent or in foreclosure within six months. That compares with less than 2 percent for 2003 loans shortly after their origination.

“This is the worst performance for subprime loans since they became a major force in the market,” the study says.