Politics & MoneyMortgage

Slight opening of credit spigot aids housing outlook

While the housing market will not make a complete return to pre-crisis conditions, many promising improvements will be drivers this year including a slight opening of the credit spigot creating a positive outlook for the market, according to Moody’s ResiLandscape report.

The housing recovery that began in 2012 regardless of constraints placed by a tight mortgage lending environment “promises improvements this year as the drivers of tough credit standards reverse,” according to Celia Chen of Moody’s Analytics, who authored the report.

Moody’s said 2012 was the best year for housing since 2005, with all of the major measures of health rising for the first time since the top of the housing boom.

However, all levels of activity remain quite weak in a historic context. For instance, housing starts posted 800,000 units last year, a far weaker pace than that of any year prior to 2008. 

Nonetheless, demand drivers are solid, suggesting that housing will stay on an upward swing. 

“Home-buying plans are improving, owning a home remains highly affordable, and household formation is rising. At the same time, the supply of homes, particularly of new homes, is exceedingly tight and overall excess supply is shrinking,” Moody’s noted.

Lack of accessibility to credit has weighed on housing demand and as a result hampered market rebound, but in 2013, the weight began to lift and will continue to do so as improving consumer credit quality and household balance sheets widen the pool of borrowers.

Total delinquencies are back down to pre-recession rates for nearly all consumer loan categories. Additionally, there are much tighter underwriting standards following the financial crisis, even mortgage credit quality is heading back into “sound territory,” according to Moody’s.

For instance, the 30-day delinquency rate is back down to where it stood at the end of 2006. Additionally, the 60-day rate has dropped to mid-2007 rates.

Stronger consumer balances sheets as well as deleveraging during the past several years has driven down household financial obligations ratio for both homeowners and rents hit its lowest level since the 1980s, Moody’s stated.

While negative home equity continues to weigh on many households, some are beginning to see their home values rise above the value of their mortgages.

“Being right-side up on the mortgage improves a borrower’s credit profile. It also lowers the risk of default and increases the likelihood of trade-up buying,” the analysts at Moody’s stated.

For instance, the amount of underwater borrowers fell below 12 million in the third quarter of 2012, compared with 14.6 million from the previous year and the 16.2 million peak in the second quarter of 2009.

Thus, falling delinquency rates, rising home equity and household debt obligations are all factors that will widen the pool of borrowers that qualify for a mortgage. 

On the supply side, uncertainties around the Dodd-Frank Act are beginning to dissipate.

Rules issued by the Consumer Finance Protection Bureau, such as the qualified mortgage and ability-to-repay rules, will keep mortgage standards as well as credit tight since lenders will be required to fully document borrowers regardless of credit history.

“However, these rules will not measurably change current lender behavior as many were already following these practices in anticipation of their implementation. Additionally, rising house prices give lenders more breathing room to extend credit,” the analyst at Moody’s noted.

Over the past 18 months, large lenders have loosened or left standards stable on prime loans that dominate mortgage originations, according to the Survey of Senior Lending Officers.

While easy credit is still a long way off as lenders begin to loosen from very high standards, the share of loans originated for borrowers with the highest credit score remain large, averaging 82% in the last two years compared with 50% in 2005 and 2006, Moody’s stated.

“Although mortgage supply will remain constrained, improved consumer credit quality combined with steady growth in jobs, low mortgage interest rates and modestly rising house prices makes it clear that more households will be able to qualify for a mortgage,” Moody’s said.

“Greater credit availability will in turn help drive stronger home sales and stronger price appreciation and help keep the housing market and the larger economy on an upward path.”


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