Incomes a Bigger Housing Thorn Than Credit
April 22, 2015
The housing market will be driven by young households and minorities in the years ahead. But until incomes improve across the board and hurdles to credit access are eased, the housing market will continue to perform below capacity, some of the nation's top economists said yesterday at a forum at the National Association of REALTORS®' Washington, D.C., office.
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American Nobel Laureate Robert Shiller of Yale University said he sees an anxiety in households today, brought about by changes in technology and rising inequality, that is slowing their march into the market. Shiller said households could be trying to save more because of this "unique uncertainty" in people today.
"There's a general tendency now for people to want to save more, because they're afraid," he said. "They're afraid for their jobs. What do you do? You don't spend money lavishly; you try to accumulate some. But they don't succeed."
Shiller, along with Karl Case of Wellesley College, created the widely tracked S&P/Case-Shiller Home Price Indices in 1991. The forum was hosted by NAR, the National Association of Home Builders, and McGraw-Hill Financial Global Institute.
Economists at the forum said today's housing market represents just a partial recovery from the severe downturn that hit the United States about seven years ago, but they differed on how much of a role overly tight credit is playing in the slow return to a full recovery.
NAR Chief Economist Lawrence Yun said lenders continue to impose hurdles to conventional financing on many creditworthy households. Among other things, the typical credit score for FHA borrowers is 690, even though FHA allows borrowers with credit scores of 650 into its programs. And the typical credit score for borrowers obtaining conventional financing backed by Fannie Mae and Freddie Mac remains about 750 — very high by historical standards.
He also said Fannie, Freddie, and the Federal Housing Administration continue to base their approval models on credit scoring criteria that should be updated to reflect improvements in data analysis as well as changes in demographics and how people use credit today.
What's more, home prices are rising faster than incomes because inventories of homes available for sale remain low. Right now, new homes are coming onto the market at about half of historic norms, creating a supply-and-demand mismatch that keeps younger households on the sidelines.
One reason for the low level of new starts is the difficulty small builders are having obtaining construction loans. These small builders typically comprise the bulk of new home construction in the country, but they're unable to compete for financing with large builders, who have access to Wall Street financing.
Yun cited community banks' difficulty making loans profitably while complying with new bank regulations that came out of the Dodd-Frank banking reform law enacted after the downturn.
Anthony Sanders, distinguished professor of finance at George Mason University, agreed that credit access needs to improve but said the fundamental problem goes beyond that: it's weak income growth among households, which is limiting demand for homes.
"It's not credit, folks," he said. "It's demand. Borrowers are poorer now, after millions went into foreclosure. It's a different economy we're facing right now."
Also participating in the forum were David Blitzer, managing director of S&P Dow Jones Indices, and David Crowe, chief economist of the National Association of Home Builders.
In another panel, participants were Bill Emerson, CEO of Quicken Loans; Julia Gordon, senior director of the Center for American Progress; Ron Hayne, senior vice president of the Independent Community Bankers of America; Joe Nery of the National Association of Hispanic Real Estate Professionals; and Brad Shuster, chairman and CEO of National MI.
NAR Immediate Past President Steve Brown gave opening remarks.
—By Robert Freedman, REALTOR® Magazine
Updated: June 18, 2018