The Tight Lending Myth That Came & Left



Those who follow housing economics in America have heard, for many years now, that tight lending conditions are holding back a full housing recovery.  If you have been following my posts, however, you know that I have been saying something completely different. Since I first starting writing about the housing market in 2010. I have stuck to the same premise that in this housing cycle (from 2008 to 2019, we simply have not had enough qualified buyers to drive the demand needed for a  real recovery – if cash buyers are excluded from the analysis. You may argue, then, that the conditions that determine if a buyer is qualified are too strict. Nay!

It is a cash flow problem, not tight lending conditions that have stifled demand in this cycle.  Since 2008, all one needs is a 620 FICO score, 3.5% down, and a debt to income ratio of 43-50% to qualify for a mortgage.   That is not tight lending!  This doesn’t mean that home sales won’t grow, or prices won’t rise, however.  The good news is that we already have the longest job expansion on record, soon to be 89 straight months. We will soon have the longest economic expansion ever in U.S. history next year, and mortgage rates have been below 5% since early 2011, with over 154,000,000 people working, and 78% of our prime age workforce are working full-time.

Purchase applications are holding up very well this year, but still at only 1998 levels.

From Calculated Risk:

Purchase application data which is holding up very well this year is still only 1998 levels

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New home sales are still meager historically and have room to grow since the monthly supply is higher this cycle than the last period.

From Doug Short:


From Fred:

JULY 2018 new home supply

Existing home sales will go over 5,000,000 units. If we didn’t have record-breaking demand from cash buyers, which are still double the historical norms of 10%,  then we wouldn’t have too many prints over 4,700,000 in this cycle.

From Doug Short:

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Housing starts have been slow and steady.  We should get to that magical number of 1,500,000 total starts by the years 2020-2024.  Purchase applications, too, should get to the 21st-century level by the years 2020-2024.

From Doug Short:

FEB Starts

When one considers all those data points, housing demand is not too bad.  Demographics, affordability, and economic aftermath of the housing bubble is keeping it in check – not tight lending.

In a recent twitter conversion with the Great Tim Duy, I listed some of the reasons why we shouldn’t blame tight lending:

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The unfortunate truth is that it is costly to be poor in America – this is especially true for home buying.  A low fico score borrower typically doesn’t have 20% down and so will have to pay a higher interest rate and mortgage insurance. This means that the total cost of housing is going to be much more expensive for them, even before considering the rise in home prices since 2012. Low credit score borrowers already have financial stress due to credit card debt, car loan debt, student loan debt, and high rent costs.  Under those economic circumstances, home buying isn’t even on their radar yet.  To their long-term benefit, low-income borrowers haven’t also been trying to buy homes in this cycle, as compared to the last period. This is something that the talented economist at Core Logic Sam Khater agrees with


The 3 most important factors that are keeping low FICO score Americans from home purchases are Cash flow,  Debt to Income Ratios, and lack of Liquid Assets. Maybe in the years 2020-2024, we will see a higher number of Americans able to buy homes but don’t hold your breath, if home prices keep on rising.

If you want to see real inequality issues in America, compare the financial profiles of homeowners vs. renters.   Low FICO score Americans aren’t coming back into the housing market, and typically when they’re ready, their FICO scores are higher.

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing marketLogan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own Facebook page

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