A smaller housing bubble: prices up, easier credit but homeownership down, fewer involved

Discussion of a looming housing bubble hints at similar factors to the problems of the 2000s:

The number of FHA-insured borrowers who are behind on mortgage payments has jumped, Wade wrote in her testimony. The use of down payment assistance is up. The frequency of FHA borrowers who are spending more than 50 percent of their income on debt payments has increased, too. And the number of borrowers refinancing their homes to take cash out for other uses has swelled…

After years of tight credit in the aftermath of the Great Recession, both conventional mortgage lenders and the FHA have been easing credit standards — allowing for low down payments, for example, or higher levels of borrower debt — to lure first-time and low- to moderate-income buyers back to the housing market, industry observers say. By making it easier for these groups to obtain mortgages, the observers argue, it is only natural to see a modest uptick in missed payments — especially by FHA borrowers — after almost seven years of steadily dropping delinquency rates.

Not all market observers are convinced that these changes are OK. As federally sponsored mortgage giants Fannie Mae and Freddie Mac, as well as the FHA, have introduced these easier credit requirements to promote more homeownership, some critics worry that the mortgage industry could be headed toward dangerous  territory if it continues to become easier to get a mortgage — especially amid what Edward Pinto, a fellow at the conservative think tank American Enterprise Institute, currently calls the “Housing Boom 2.0.” By allowing borrowers to take on more debt or put less money down on a house in today’s super-charged real estate market, observers such as Pinto argue, lenders could be setting themselves up for higher rates of borrower default in the event of a recession — something that Pinto believes is not too far off…

To be sure, observers such as Nothaft add, the current easing of today’s requirements is nowhere near where it was a decade ago. Leading up to the recession, lenders were allowing borrowers to provide no documentation of their finances and granting loans with no money down.

Given the fallout and long recovery time after the burst housing bubble of the late 2000s, few policymakers or lenders would want a repeat. Yet, there are some significant differences in the housing market right now:

  1. Prices may be up and demand may be high but fewer people are participating in buying and selling homes.
  2. Home construction is not at the same level as it was through the 1990s and early 2000s.
  3. Lenders are not quite providing mortgages with the same terms they had in the 2000s (as noted above).
  4. Homeownership in the United States is at relatively low levels: 64.2% in the first quarter of 2018 after even lower figures in previous years.

All together, this suggests that the scale of a new housing bubble would be smaller than the last one. Perhaps significantly smaller. Fewer buyers, sellers, and lenders got caught up in the rising housing values (and low interest rates) of recent years.

This does not mean that there would not be pain if housing prices and lending collapsed a bit. But, the consequences would simply exacerbate some of the issues various interested parties have discussed:

  1. If prices decrease, even fewer people might be willing to sell their homes. This drives supply even lower.
  2. How much lower could interest rates really go? How much profit could lenders generate?
  3. This could decrease motivation for builders and developers, particularly at the lower ends of the market where there is already significant demand.

The conditions and consequences of a housing bubble today or the next year or two could be very different than the economic crisis we now think we have some handle on from the late 2000s.

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