On the Way to a Win

Economic Commentary
By Lawrence Yun, NAR Chief Economist

Happy new year. My new year’s greeting to you contains a significant amount of good news. Just briefly, let’s look at the recent statistics for housing. Existing home sales in November were up from a year ago. Pending sales – that is, contract signings – were 5 percent ahead of a year ago. Housing inventory – the number of homes available for sale – has declined (both for existing and newly built homes). Housing affordability continues at record high levels.

There is other good news, and that has to do with home buyers who purchased homes a few years ago. Those households who purchased homes during 2009 have become one of the most successful groups of homeowners. Their mortgage default rates have been exceptionally low. I’ll discuss this more later in this article.

But there is also some not so good news. Loan qualifications have become so strict since 2009 that only those borrowers with super-high credit scores and spotless credit history are able to obtain mortgages. A good chunk of middle-class borrowers have therefore been shut out of the market. Results published in NAR’s latest Member Profile (2011) show that one third of REALTORS® indicated the most important factor in limiting their clients’ ability to buy a home was difficulty in obtaining a mortgage. The National Association of REALTORS® is not the only organization saying that. Others agree and recently we’ve seen other evidence to show that lending is just way too tight.

Earlier this month, the Federal Reserve Board issued a white paper explicitly emphasizing the need to ‘remove some of the obstacles preventing creditworthy borrowers from accessing mortgage credit’ in order to upgrade the economic growth prospects.* In the paper, the Fed also calls for increased lending to creditworthy home buyers and more loan modifications, mortgage refinancings, and short sales to reduce the rising inventory of foreclosed homes and help stabilize and revitalize the housing industry. This approach has long been recommended by NAR to help spur the housing market recovery.

Let’s also look at some of the recent data. Consider the following loan performance after one year from the time of origination on Fannie Mae and Freddie Mac backed mortgages. Loan default rates were 0.3 to 0.4 percent in the more “normal” housing years of 2002 and 2003 – before the housing boom, before all those exotic mortgage products (subprime, no-doc loans) and well before the developments of any housing bubble. In the immediate years after the bubble burst – 2007 and 2008 – default rates rose to 2 and 3 percent.

Now examine the performance for those loans originated in 2009 and 2010. The default rates came in at 0.1 and 0.2 percent after one year of seasoning. Those are exceptionally low figures – in fact, even lower than those for the normal housing years. The data for 2011 is not yet available, but several indications point towards possibly an even better loan performance than we saw in 2009 and 2010. While the headline mortgage default data are driven by the souring loans from the bubble years, the default rates among recent borrowers have been at historic lows. Banks and the regulators need to understand this important distinction and permit more loans to flow into the market.

My estimation based on credit scores of those who are being approved for mortgages today versus those who were approved 10 years ago suggests that home sales could easily rise by 15 to 20 percent if the underwriting standards were to go back to normal. That would be a sizable gain in home sales and would result in a commensurate decline in inventory. A decline in inventory and increased sales would help bolster home price appreciation. If underwriting standards return to normal, the housing market will approach a more normal state as well.

A normal housing market would help fuel a continuing economic recovery, help bolster household wealth, spur consumer spending, spawn more job creation (thus providing more fuel to the economy). It would, in effect, be a win-win situation. This is what we aim for. This is what we hope for. This is what NAR continues to work towards for its members and America’s homeowners.

Daily economic commentary from Dr. Yun and the NAR Research staff can be found at realtor.org on the Economists blog. Visit http://economistsoutlook.blogs.realtor.org. You can also follow developments and opinions on Facebook (www.facebook.com/narresearchgroup) and Twitter (http://twitter.com/NAR_Research).

*“The U.S. Housing Market: Current Conditions and Policy Considerations,” Federal Reserve Board, January 4, 2012. The complete white paper can be downloaded from www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf