Household formation down. (Click to enlarge.)

Any way you slice it, pent-up demand for home ownership is building: people are doubling up rather than starting their own households, and the rents they’re paying are increasing even while affordability on the ownership side is better than ever. So, the question is, when will this demand go from being pent-up to unleashed?

High affordability. (Click to enlarge.)

NAR Chief Economist Lawrence Yun has said existing-home sales are on track to see a modest improvement over last year. Sales could go above 4.6 million units, maybe get close to 4.7 million units, if current sales rates continue. Last year we saw 4.3 million existing-home sales.

The key to doing even better than that is confidence. If consumers are confident in the stability of the jobs picture and in the health of the housing market—that is, if they think prices have stabilized and will start seeing improvement in more markets soon—then they might start getting off  the fence in larger numbers. That’s especially the case with rental rates rising briskly, making ownership more attractive than renting from a strictly economic sense.

Rental rates rise. (Click to enlarge.)

In recent research from academics looking at the “hurdle rate,” which is the point at which it makes more financial sense to buy than rent—researchers said now is a good time to buy because of a favorable hurdle rate in markets throughout the country. (Watch 3-minute video on this.)

But buyers need to have a healthy mortgage market, otherwise household demand can’t get translated into closed transactions. And on this point, things could be better.

Cheaper to buy than to rent. (Click to enlarge.)

Without a doubt lenders are lending but obtaining financing remains too high a hurdle for many households.

One reason is the continuing tough credit standards we’re seeing among banks, and to an important extent these stringent standards stem from the so-called buyback risk that banks face from Fannie Mae, Freddie Mac, and FHA. These loan buyback requirements have long been a policy option of the secondary market companies, but they rarely exercised the option in the past. That changed, though, after the mortgage crisis; companies started taking a close look at banks’ underwriting practices and if they thought shaky loans were being made, then the banks could be on the hook for those loans.

As a result of the stepped-up use of that policy, banks have put in place the credit overlays that sit on top of Fannie, Freddie, and FHA underwriting standards. These credit overlays, in effect, put loans out of reach of some households whose credit profile would otherwise fit okay under the secondary market standards. Yun has said home sales could be 15 percent higher if these strict requirements were replaced with more normal standards.

This credit overlay issue is something the banks have to work out in tandem with Fannie and Freddie, and in fact Bank of America about a month ago took an attention-grabbing step by saying it would stop selling loans to Fannie Mae out of concern with its buyback policies. How that will work out is unclear, but it suggests at least one bank wants this buyback issue behind it.

But there’s another mortgage issue that’s rearing its head, and for this one there’s not much the banks or the secondary market companies can do: that’s the rise in fees the government is imposing on the mortgage market.

In another month, the fees that banks pay to Fannie and Freddie to guarantee the mortgages they buy are going up by 10 basis points. That fee, known as the g-fee (for guarantee fee) is invisible to borrowers, but lenders can be expected to build the increase into the interest rate they charge borrowers, so the cost of loans will go up.

Congress mandated the fee increase to help it extend the payroll tax cut at the end of 2011, so you have the unusual situation in which funds generated by the housing industry are being plowed into a non-housing use. That sets a bad precedent, NAR has said, and in fact there’s talk on Capitol Hill of using future g-fee increases to pay for other things.

Meanwhile, FHA has increased its mortgage insurance premiums, both the upfront and the annual, to help it shore up its finances. In addition to improving its financial condition, federal officials have said the increases will help the agency reduce its market share, something the Administration’s been wanting to do for a while to encourage lenders to get back into the market on their own.

Looking at all these developments, what you have is a home-sale market that’s poised to improve because of pent-up demand and high affordability but that remains hobbled by a still-shaky mortgage market.

On a positive note, though, as Yun has pointed out, home sales are picking up slowly despite the mortgage market challenges, and that says something about the strong pull home ownership has to people who are ready to buy.