President Obama and his staff at the Treasury’s Homeownership Preservation Office are calling for mortgage lenders to be more subjective in their lending policies and argue that first-time buyers with short credit histories and low income have no place in the homeowner’s market. Experts argue, however, that the real problem is that income isn’t rising to meet the increased costs of housing and that the real reason homes are perceived as affordable now is because of historically low interest rates. Zillow reports that the percentage of income spent on living have skyrocketed when compared to pre-bubble family budgets. For more on this continue reading the following article from TheStreet.
The Obama administration is pushing banks to extend mortgages to more borrowers, arguing that credit standards have become overly tight in the wake of the crisis.
The Washington Post reported last week that officials are urging banks to use "subjective" judgment in making loans even as they adhere to new rules defining quality loans.
At a recent conference, Laurie Maggiano, director of policy for the Treasury’s Homeownership Preservation Office, defended the push for looser credit standards, arguing that first time home buyers with lower incomes and limited credit history were locked out of the market. "Where are these folks supposed to live?" asked Maggiano, according to Housing Wire.
I suppose they will rent.
The Obama Administration’s focus on loosening credit ignores the real problem — incomes are not growing fast enough to keep pace with rising home prices.
A report from Zillow on Wednesday showed that record housing affordability is almost entirely due to low interest rates.
In the pre-bubble period from 1985 through 1999, when rates for a 30-year fixed mortgage ranged between 6 percent and 13 percent, Americans spent 19.9 % of their median monthly incomes, on average, on mortgage payments for a typical, median-priced home. At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4 % range, U.S. homeowners paid 12.6 % of their monthly income on mortgage payments, down 36.9 % from historic, pre-bubble norms, according to Zillow.
However, homes have become more expensive relative to incomes. "In the pre-bubble period, U.S. homebuyers spent 2.6 times their median annual income, on average, on the purchase price of a typical home. But through the end of 2012, buyers nationwide were spending three times their annual incomes, meaning homebuyers were buying homes that were 14.5 percent more expensive relative to their incomes than during the pre-bubble period," according to the report.
In San Jose, California, for instance, the percentage of monthly income dedicated to mortgage payments has dropped from 35% in the pre-bubble period to 29.5% in the fourth quarter of 2012. However, median home prices have shot up to 7 times median income in the region, from 4.6 times in the pre-bubble era.
No wonder most Americans struggle to make a 20% down payment. They cannot save that kind of money on stagnant wages. Without credit, the dream of homeownership will be elusive.
But the answer to unaffordable housing isn’t more shaky home loans, any more than the answer to the rising cost of college education is more student debt.
College costs have been soaring and enrollments have increased as higher education promises better job prospects and incomes. Federal loans have helped students go to college in increasing numbers. But students have struggled to find jobs that would help them pay back their loans, saddling them with inescapable debt.
In housing, "we are encouraging people to buy an asset that, when rates go back to 6%, to 8%, will look a bit overpriced" relative to incomes, Zillow’s Humphries told the Wall Street Journal.
Underemployment and stagnating incomes are structural problems with the U.S. economy that were for a long time masked by easy credit. Access to credit enabled borrowers to spend more even though their incomes weren’t growing, one of the many reasons that sparked the financial crisis.
Banks are right to proceed with caution when it comes to extending home loans under current economic conditions.
Yes, there is an argument to be made for looking at borrowers on a case-by-case basis rather than freezing out all borrowers who do not have a credit score of 700 or more.
But the threat of litigation and the increased cost of servicing delinquent loans has made banks wary of lending to those with a spotty history.
By pressuring banks to do so, the government is just sending banks mixed signals. Regulators view mortgage lending as more risky. New Basel III Capital standards for instance require banks to hold more capital when they make loans with low down payments.
Unless banks can see sustained job growth accompanied by higher incomes, they are unlikely to loosen their credit standards.
Right now, it appears that the housing market is being driven higher by cash-rich investors and buyers.
Maybe prices will rise long enough to create a self-sustaining recovery in housing, where higher home prices drive higher construction activity, leading to more jobs and stronger incomes. Housing has, historically, had a multiplier effect on the economy.
But the housing boom needs to be on the back of real growth in other sectors of the economy. Open the credit spigot too early and we risk another bubble.
This article was republished with permission from TheStreet.