Credit Availability: Trends, Issues, and Implications for First Time Home Buyers
Presentation by Dr. Laurie Goodman, Urban Institute
REALTOR® University Speaker Series
Dr. Goodman presented an analysis of mortgage credit availability, concluding that lending standards have been excessively tight as a result of reactions to credit problems experienced during the Great Recession:
Compared to 2001—a time of normal credit availability—the FICO scores required by lenders in making loans have increased significantly—thereby decreasing the number of loans made to potential buyers with credit scores under 720.
Requirements and standards for loan documentation have risen substantially and unnecessarily: for example, mortgage applications processed per underwriter decreased from approximately 188 per month in 2002 to 36 per month as of 2013.
Penalties to financial institutions for mistakes in processing loan documents—even if minor– have been unrealistic and inappropriate in many cases. To some degree the word “paranoia” describes some lender attitudes related to government lending requirements.
Dr. Goodman’s analysis showed that an additional 1.2 million home loans per year could have been made in 2013 if credit availability had been based on the lending standards in effect in 2001, a time during which normal, prudent lending conditions prevailed. Unrealistic credit requirements and lender concerns have had a major, negative impact on the housing markets: i.e., mortgage credit has been too tight. This is starting to change. Dr. Goodman mentioned that a number of recent actions by FHA and FHFA have to some degree increased credit availability. However, it appears that substantial additional loosening of credit requirements and procedures continues to be needed—just to attain normal lending standards.
Looking to the future, Dr. Goodman discussed the projected profile of future home buyers. In 2010 among homeowners identified as White, 72 percent owned a home. White non-Hispanic buyers are projected to account for fewer than 23 percent of buyers by 2020. Future home buyers are projected to be largely Hispanic, African American, and Asian. These groups currently have a homeownership rate below that of White homeowners, but will be the bulk of the market in the future. In addition, although home sales will expand as the population grows, homeownership rates will probably decline in the future due to changing demographics and lifestyles, possibly reaching 61 percent by 2030, compared to 65 percent in 2010.
Dr. Goodman’s presentation and accompanying PowerPoint slides can be found here.
What Does This Mean for REALTORS®?
Changes in interest rates are not the issue, regardless of what is in the press. In addition, home prices continue to be affordable. Credit availability and –most particularly its increased availability—is the central issue currently influencing housing markets. There have been some improvements, and Dr. Goodman’s presentation shows that with additional loosening the housing markets can grow further. Overall, that’s good news.
In the meantime, finding mortgage money and qualifying for the mortgage will important in bringing the home search to a successful conclusion. As noted in various NAR sources, local and regional banks as well as credit unions may be good possibilities for mortgage money in comparison to other sources. Overall, Dr. Goodman’s presentation is positive—there is significant upscale potential for the housing markets as credit requirements ease.
Jed Smith, Managing Director, Quantitative Research
Jed Smith is Managing Director, Quantitative Research with the National Association of Realtors®. He has worked on real estate issues for the past 20 years, providing input on a variety of housing, commercial real estate, tax, and planning issues. Recently he has been involved in several international studies.