Consumer Finance

Credit Restrictions Make Real Estate Buys Stall

If the American dream is buying real estate, the U.S. is becoming a divided market, where some dreams come true and others must keep wishing and hoping.

As reported in the Wall Street Journal, the housing lending market has become a bifurcated one, with credit costs low in a phenomenally low interest rate environment. But banks are tightening the reins on risks they will take, which translates into lending reticence.

The result is that relatively well off would-be borrowers can get the loans they want (as can home builders as they fund projects), but those with less-than-stellar credit profiles or steady income records may in fact be frozen out of the real estate market. And against that backdrop, with money cheap but, as the WSJ noted, “hard to get,” the economic growth in the United States has been muted, as measured by private investment, which stands at 6 percent above pre-recession levels (per capita). That’s because single-family home building, which usually accounts for 2 percent of the U.S. GDP, has fallen to about 1 percent since the end of the recession in 2009.

Within the private investment sphere, there are double-digit percentage climbs over pre-recession levels, as measured in cars and smartphones. But residential real estate — which in turn boosts spending on big-ticket items such as appliances and furniture — is 22 percent below that pre-recession benchmark, as the Federal Reserve of St. Louis has noted. Home prices have been on an upswing since 2011, but another divergent path is at work, as new home construction has come up only to recessionary levels and now is 30 percent below an average seen across decades from 1983 to 2007.

For lending, the rebound has been sharp, viewed through a surface lens, up to its highest levels since June 2007, and as measured through the second quarter of this year.  But those loans have been doled out to borrowers with credit scores of 700 and above.  The subset of borrowers with scores below 700 made up just 15 percent of loan originations. Analysts at Pacific Investment Management have estimated that as many as 1.4 million Americans who would have been approved for mortgages in 2002 would not be able to get those loans today.

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