Despite the threat of looming foreclosures across the United States, the housing economy continues to pick up steam thanks to optimism, low mortgage interest rates and real estate that is comfortably priced in several regional housing markets. There is, however, one major factor standing in the way of true, unbridled recovery: Strict credit and underwriting requirements by mortgage lenders.
The latest reports issued by the U.S. Commerce Department indicate that new residential construction activity rose by 3.6 percent, a figure that has been seasonally adjusted over the last 12 months. This translates into 894,000 home sites breaking ground around the country, a pace not seen since the summer of 2008. It is important to note that this statistic takes into account the slowdown in construction in the Northeast region affected by Hurricane Sandy's destructive landfall.
Existing Home Sales Also on the Rise
The supply of existing homes available for sale diminished further in October as purchasing activity increased by 2.1 percent. Home builders are betting on this trend to continue so that they have more opportunities to profit from the dwindling home supply. Real estate investors are betting on a speedier pace of foreclosures to fill the Real Estate Owned (REO) portfolios of major banks, but there is some uncertainty in this regard.
The nationwide supply of homes available to purchasers is officially under six months, a number last seen at the height of the housing bubble in late 2005. Real estate median prices are inching up, a clear sign of a recovery. The only factor casting a dark cloud over the improving housing economy comes from mortgage lenders.
Shutting Out Average Home Buyers
The National Association of Realtors estimates that 30 percent of all home purchases are being conducted by real estate investors who show up to the closing table with cash. This rate does not signal a true recovery that could be sustained in the long run. First-time home buyers are the most important participants in a real estate economy, and many of them are being excluded by the stringent lending requirements that became the norm after 2008.
With many lenders insisting on 20 percent down payments, a considerable number of borrowers are simply priced out of the market. Combining high down payments with tri-merge credit scores of 720 and impeccable credit histories effectively shut out many mortgage applicants.
Federal Reserve Chairman Ben Bernanke recently mentioned this situation, explaining that this tight lending standards could now be preventing economic recovery by slowing down the housing market. He compared the effect to a pendulum that has swung too far in the opposite direction.