Have you noticed that there is a cacophony of opinion and conflicting information on the health of the housing market this spring?
Rising rates and regulation will stifle demand. Housing is suddenly unaffordable and there is risk of another bubble.
Aren’t these contradictory arguments? If demand is going to be stifled, then how can we have another bubble?
After all, an asset bubble is defined by irrational exuberance as exhibited by excess demand. Isn’t the rule, you can’t have your cake and eat it too?
Either demand is stifled or there is a bubble, but not both.
Instead, here are the three things that, in my mind, really matter this spring.
1. Availability of Credit
The housing market runs on the availability of credit. Most of us can’t buy a home without it. Analysis of the credit profiles of recent purchase transactions tells us that the only real dimension in which credit availability is “tight” right now is with credit scores. Under more normal circumstances in the early aughts, a little more than 10 percent of purchase originations had credit scores below 620.
At the moment, only 0.3% of purchase mortgage originations have credit scores below 620. There are good signs this spring, however, that standards are relaxing in this dimension as lenders are announcing reductions in minimum credit score requirements. Before you lament the resurgence of the disastrous subprime loan, remember that lending to borrowers with lower credit scores can be done successfully if you don’t also layer on payment shock risk and high leverage.
2. Pent-Up Supply
Most homebuyers are also first home sellers. Even in the best of times, first-time homebuyers account for well less than half of home purchases. The existing homeowner who sells and then buys (we call this housing turnover) is the lifeblood of the housing market. Yet, many still are under-equitied, meaning they’re underwater or have less than a 20% equity stake.
The impressive gains in home price appreciation in many of the hardest hit markets have created a virtuous cycle though, relieving more homeowners’ under-equitied situations and putting them in the position to become sellers and then buyers again this spring.