WASHINGTON — Ben Carson is facing a turbulent housing market as he takes the reins of the Department of Housing and Urban Development, with mortgage rates rising, inventories tight and home prices higher.

With little experience with housing issues, Carson, who was sworn in Thursday after being confirmed by the Senate, must also soon make critical decisions regarding the Federal Housing Administration single-family program.

Chief among them is whether to move forward with an Obama administration plan to cut the FHA's annual premium. The Trump administration put the move on indefinite hold, but many in the market are still hoping Carson will enact it.

HUD Secretary Ben Carson
One big decision new HUD Secretary Ben Carson will have to make is whether to move forward with plans to cut FHA's annual premium. Bloomberg News

But some industry analysts are arguing Carson and his team were right to put the premium reduction on ice.

"We think that was a good thing. We are hopeful this is indicative of a more reasoned approach to leverage," said Edward Pinto, a resident fellow at American Enterprise Institute and co-director of its International Center on Housing Risk.

The 25-basis-point reduction in the FHA annual premium could have "very negative impacts on FHA first-time homebuyers in terms of higher prices and use of this buying power," said Pinto, who served on Trump's transition team. Over 80% of FHA homebuyers in November were first-timers.

He and others are warning that now is not the time to loosen lending standards. Demand for homes is out-stripping supply and pushing up housing prices.

Relaxing lending standards will only "worsen the supply/demand imbalance," said Tobias Peter, a senior research analyst at the American Enterprise Institute's center for housing risk.

The further prices move away from market fundamentals the more "painful the correction will be," Peter said.

The National Association of Realtors is also concerned about rising mortgage rates and house prices. “Rising mortgage rates should not be boosting home prices," said its chief economist, Lawrence Yun. "Such a trend of price growth outpacing incomes is not healthy nor sustainable. Only an increase in inventory can soften the price pressure."

But Yun disagreed with Pinto's warning not to ease lending standards.

"One way to address this is to just choke off demand by raising credit standards even further or not loosening," Yun said in an interview. "Maybe demand will retreat and match the supply. But I don't think that is good given that the homeownership rate is at a 50-year low."

Instead, he said, "we need to address the supply situation" by removing impediments to homebuilding, whether it is land use, zoning laws, impact fees and construction loan availability.

In addition, FHA premiums should be reduced, Yun said. Even with a 25-basis-point reduction, FHA premiums are "still high," he said. "We can't keep damaging the homeownership rate."

Increasing the supply of homes will tame price growth. "That will be a better outcome than choking off demand," he added. "But I agree with Ed Pinto that we can't just simply stimulate demand without looking at the supply."

The debate over the future of the housing market comes as homebuilders are hoping to win some regulatory relief from the Trump administration.

"I think it is on the administration's radar as part of a broader regulatory agenda. That would certainly have a big impact," said Robert Dietz, chief economist for the National Association of Home Builders.

It is estimated that the upfront regulatory costs of building a new home is now $85,000, which makes it a challenge to build entry-level homes. "It is hard to build a home at the $200,000 level," Dietz said.

Economists at Wells Fargo Securities recently raised their estimates for building activity because of expectations of the Trump administration's agenda.

"We have slightly increased our forecast for new home sales and housing starts for 2017 and 2018 based on the expectations that the Trump Administration will succeed in cutting income tax rates and also ease some regulatory burdens for builders, developers, lenders and home buyers," a Feb. 14 Wells Fargo Economics Group report said.

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