September 5 - We have been stating for a long time that one of the most important reasons for the current low demand is the poor supply of financing for prospective home buyers, particularly those with moderate to good credit. Those with stellar credit usually have no problem qualifying and getting approved for a home loan. However sellers should remember that the number of people with stellar credit is very limited and insufficient to sustain a healthy housing market. It is unwise for people with poor credit to get approved for home loans. This was what caused the housing bubble. However, unless those with moderate to good credit can get access to home loans, the housing market will continue to under-perform expectations. This is likely to slow the entire economy, with the all the resultant impacts on employment.
Here are some recent quotes which shed light on the situation:
- John Stumpf, CEO, Wells Fargo: “If you guys want to stick with this program of ‘putting back’ any time, any way, whatever, that’s fine, we’re just not going to make those loans and there’s going to be a whole bunch of Americans that are under-served in the mortgage market." (those guys refers to Fannie Mae and Freddie Mac).
- James Dimon, CEO, JP Morgan Chase: "We want to help the consumers there, but we can’t do it at great risk to J.P. Morgan, so until they come up with some kind of safe harbors or something, we’re going to be very, very cautious in that line of business." (that line of business refers to home loans).
- Janet Yellen, Chairman, Federal Reserve: "It is difficult for any homeowner who doesn’t have pristine credit these days to get a mortgage.”
- Lawrence Yun, Chief Economist, NAR: “A robust recovery is not occurring. We are projecting a slow recovery in home-sales activity because of the current tight underwriting standards.”
The banks feel sore that the FHA has disputed roughly a third of all insurance claims causing banks to take more losses than expected. This has reduced their appetite for risk. Unlike the rest of the world, the banks in the USA are used to the government guaranteeing a large percentage of home loans and bailing them out if there is a problem. It does not appear that the lenders are willing to take more mortgage risk on themselves, even though they do this all the time outside the USA, where government guarantees are very rare.
The Mortgage Bankers Association is predicting that purchase mortgage originations will decline 12% in 2014 to $576 billion. Given that average prices are higher than last year that will result in an even larger drop in financed units. At the same time, all-cash deals are dropping even faster as investors' former appetite for home acquisition has been largely sated. The result is very predictable - unusually weak demand for purchased homes and unusually high demand for rentals. However, the increased demand for rentals will be primarily from those with moderate to good credit, not from those with excellent credit. This will benefit landlords providing moderately priced rental homes. Higher end rentals will probably be unaffected.
Approved home loans are the fuel that drives the housing market. The year 2000 was a relatively normal year for home loans. With roughly the same level of applications as in 2000, 15% more mortgage applications are being denied in 2014 than in 2000.
The good news is that credit quality for home loans made since 2008 is very strong, probably the best in living memory. However, unless lenders revert to more normal levels of risk taking, the outlook for the for-sale housing market will remain sub-par and the recovery will probably remain stalled.