Rising Home Prices Revive Lax Lending Standards

Rising Home Prices Revive Lax Lending Standards

With home prices continuing to rise, easing lending standards appears to be the quickest solution, notes a Sterne Agee analyst.

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Lindsey M. Piegza, Chief Economist at Sterne Agee in the ‘Economic Insight’ report dated April 25, 2014, points out heightened costs have dampened sales, as many home shoppers are simply priced out of the market.

Climbing home prices

The Sterne Agee economist points out that housing prices are once again rising quickly. Citing the S&P/Case-Shiller composite index of 20 metropolitan areas, she points out home prices rose 0.8% in January while they rose a whopping 13.2% over the past 12 months. The following graph captures the rising trend in the home prices:

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However, she also points out that such rising home prices offer real benefit for existing homeowners, as rising prices would translate to increasing wealth, with housing accounting for over a quarter of total household wealth.

Citing Zillow, Piegza notes as of December 2013, the overall cumulative value of the U.S. housing inventory is roughly $25.7 trillion, up $1.9 trillion or 8% from 2012. Lindsey notes that this is the second consecutive annual gain after home values fell every year from 2007-2011, when the value of the US housing stock fell over $6 trillion. The following graph captures the overall cumulative value of the U.S. housing inventory:

Annual change in total value of all homes

Brokers return to past methods

The Sterne Agee economist writes the rising prices pose a powerful barrier to potential homebuyers. The increased costs have dampened sales and many home shoppers are simply priced out of the market. She points out that in the most recent housing report, existing home sales fell 0.2% in March, dropping from 4.60M to a 4.59M unit pace. Moreover, new home sales fell a whopping 14.5% in March, dropping from 449k to 384k, the lowest level witnessed since July and the third monthly decline in six. The following graph illustrates the drop in the existing and new home sales:

Fall in home sales

Piegza notes if home prices continue to support its uptrend, there are only limited options to offset the rising costs of purchasing a home. The deal choice could be an equally sizable increase in wages, though given the significant slack in the labor market, this does not seem likely. Therefore, Piegza believes a significant reduction in credit restrictions would to be the most probable and quickest solution.

However, Piegza notes lenders have already started to ease requirements by accepting lower credit scores and reducing down payment requirements. She points out that Mortgage Bankers Association report reveals over the past 12 months, more than one in six mortgage loans were made with a down payment of less than 10%. The economist notes with housing prices outpacing wages, we should expect to see more mortgage lenders of all sizes evaluating their lending practices.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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