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Easing lending standards bring back first-time buyers

Capital Economics: The housing recovery needs this

Easing mortgage standards are allowing first-time homebuyers to finally jump into the housing market after a rough start to the year held a lot of them back.

According to a new report from Capital Economics, “Lenders have accelerated the easing of mortgage lending standards in recent months, thanks to a steady reduction in mortgage delinquencies and new GSE policies. That has started to boost the number of first-time buyers – a necessary development if the housing recovery is to continue.”

This is welcome news since the year didn’t start off that promising due to tight credit conditions.  

The Capital Economics report attributed some of the reasons that lenders are now more willing to relax lending conditions to these two things:  

1. Thanks to the improving labor market, mortgage delinquencies have fallen from 5.7% of outstanding loans at the end of 2014 to 5.3% in the second quarter.

2. Fannie Mae and Freddie Mac clarified the rules around mortgage buybacks in early October, which may have boosted lenders’ confidence.

While there are likely more explanations behind the increase, Capital Economics said there is some evidence that looser credit conditions are helping boost the number of first-time buyers.

The report referenced the National Association of Realtors’ survey that showed the share of home sales going to first-time buyers has increased from 29% in the first quarter to just over 30% now. It’s important to note that the survey can suffer from a small sample size, and is very volatile, Capital Economics stated in its report.

However, another report from Housingrisk.org, based on agency mortgage lending data, showed the share of mortgages going to first-time buyers has risen sharply since the start of the year.

As a result, the report concluded that it does look as though lending standards are being eased more rapidly, and that has begun to assist more first-time buyers into homeownership. 

"That is an important development, as a steady rise in mortgage dependent first-time buyers is required to ensure that the recovery can continue," the report said. "While low inventory levels will mean some of that rise in first-time buyers demand is transferred into higher prices, if supply constraints ease as we expect, then looser credit conditions will also help home sales to rise steadily over the next few years."

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