Many economic indicators point to an eventual resurgence in the homeownership market: Interest rates remain at record lows; The Wall Street Journal reports that home values declined in all but five of the top 28 markets while rents continue to rise; and mortgage rates remain at their lowest levels in 60 years. With this seemingly perfect confluence of factors, why, then, are more people choosing to rent, rather than buy, a home?
“The problem is with access to credit,” says Moody’s Analytics’ Chen. “Even though housing is affordable, lenders are tight in offering credit.”
That difficulty in obtaining a home loan is hitting would-be first-time homeowners the worst. The NAR’s Molony says that a recent study by his organization indicates that the median income of first-time buyers is $62,400, up from $59,000 in 2010. The average credit score jumped from 717 in 2007 to 760 in 2010. Now, it’s at 755.
Buyers also need more for downpayments. After peaking at 80.4 percent in 2007 (its highest level since the early ’90s), the loan-to-price ratio fell to 72.7 percent in early 2010 and ended the year just above 75 percent, according to data from the Federal Housing Finance Agency. This indicates that buyers are having to get a lot more money down to get their loans. And yet, first-time buyers dropped from 50 percent of the market in 2010 to 37 percent in 2011, according to the NAR—and that was largely due to the lack of availability of financing.
While no one is advocating a return of the wild days of the mid-2000s, many on the for-sale side point the finger at banks, saying now is the time to loosen up lending.
Molony says that home sales would rise 15 percent or 20 percent under normal underwriting conditions. “The banks are going to have to overcome the fear obstacle,” he says. “They’re sitting on a lot of cash. They need to get back into the business of lending.”
The NAHB’s Crowe assigns the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, a lot of blame for the tight credit market.
“Fannie and Freddie have already returned mortgages to originators when they don’t do something right,” Crowe says. “The lenders are being very careful so they don’t get the loan rejected by the GSEs.”
Unfortunately, that seems to be the status quo for the next several years. Even if Congress privatizes Fannie and Freddie, it could raise borrowing costs, which would make homeownership difficult for an even longer period of time.
“The likely outcome is a form of federal backing depending on private markets,” Crowe says. “To the extent that it’s more private and less government, it will cost more.”
Mike Fratantoni, vice president of research and economics at the Washington, D.C.–based Mortgage Bankers Association, says credit has eased a little in the jumbo loans (those over $625,500) area, but it has been extremely difficult to get a loan in that segment. Prime borrowers can get credit throughout the range of prices, but it’s tougher for others. And Fratantoni doesn’t see that changing anytime soon.
“You have to layer on top some new regulations, like risk retention and other issues that are part of Dodd-Frank [the Dodd–Frank Wall Street Reform and Consumer Protection Act],” Fratantoni says. “Those will probably pinch [the banks] in even tighter. I really don’t see any scenario where credit gets much looser.”
But the NMHC’s Bibby thinks the powerful lobbies representing for-sale interests will eventually force open the lines of credit. And he disputes the perception that underwriting isn’t “normal” nowadays.
“You’re getting pressure from all of the groups that want to see a more vibrant housing market,” he says. “They all feel the pendulum has swung too far the other way. In reality, underwriting basically has reverted to the norm, which may not be helpful in resuscitating the market.”