In what looks at first like the longest and most optimistic reach for finding good news in all the bad data, Capital Economics posits the idea that rising house prices are increasing the ability of many households to meet minimum deposit criteria, which may be a sign that this week’s 10.3% jump in mortgage applications after steady weeks of declines is a sign of the start of a more sustained improvement.
But on second look they may be on to something, and this isn’t just the usual sunny-side up analysis.
Noting the dearth of mortgage applications, Capital Economics admits that this week’s outlier rise doesn’t change the flat landscape, where applications are still close to rock-bottom levels.
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“However, data on the characteristics of successful and denied mortgage applications offer some hope that a turning point may have been reached. In particular, it is striking that the typical loan-to-value ratio (LTV) for an unsuccessful house purchase application over the past year fell from 85% to 82%,” the report says. “At first glance, it may seem counter-intuitive to interpret those numbers positively. The decline in LTV ratios implies that would-be borrowers are offering to put down larger deposits than they were a year ago.
“Yet despite that, their applications for home purchase are still being turned down. This could be a sign that lenders are becoming more cautious and thatX a recovery in mortgage lending remains a very distant prospect. However, we are inclined to view the data in a more positive light,” the report says.
After allowing for the fact that average house prices have risen by 10% to 12% over the past year, the fall in LTV ratios implies that the size of the typical cash down payment has risen by around a third.
The fact that households are now able to put down materially more cash than a year ago seems consistent with the idea that house prices rises are lifting more and more households out of negative or low equity. And if a lack of equity has been discouraging large numbers of households from moving and making a mortgage application, this implies that one of the major constraints on demand is easing.
“That said, we expect only a modest upturn in lending from here. For one thing, employment may be making steady gains, but as yet average income growth remains soft and yesterday’s retail sales data point to a still-cautious mood among US households,” the report says.
“And as demand becomes less dependent on investors and more driven by repeat buyers, supply conditions should ease. In turn, that will slow the rate of house price inflation and the rate at which existing homeowners amass equity,” it says.
Moreover, while LTVs have become a less critical factor in determining the success, or otherwise, of a mortgage application, there is little sign that underwriting standards are being relaxed to any great extent.
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Lenders are still demanding that borrowers have an above-average credit rating and that a borrower’s total debt payments on the mortgage and other loans are kept to no more than 37% of income.
Yet such stipulations make sense as the first rise in US interest rates draws closer.
“And while there is a risk that lenders may choke off the recovery by keeping lending criteria too tight, ultimately a recovery built on jobs and income growth, not looser credit conditions, will be far more durable,” it concludes.