Tight Home-Loans Credit Standards Should Subside

Fleming: “I am cautiously optimistic for this year and next.”

IRVINE, CA—The tightness in the overall home-loan market is really due to change that will be sorted out by industry participants over time, First American Financial Corp. ‘s chief economist Mark Fleming tells GlobeSt.com. Moreover, in a recent report from the firm, Fleming commented on real house prices and affordability : “While median household income growth since the end of the recession has barely kept pace with inflation, mortgage rates—particularly for the popular 30-year, fixed-rate mortgage—have declined significantly. At the end of the recession in 2009, the 30-year, fixed-rate mortgage was more than 5%. It has subsequently declined to below 4% today. Low rates have fueled increases in consumer house-buying power, keeping real house prices low by historic standards.” In comparing real house prices in San Francisco and Detroit, Fleming said surprisingly both markets experienced similar real price declines, about 60% over the course of three years, and very little “’recovery” has occurred in real prices. “The common perception is that San Francisco (the shining example of the new economy) and Detroit (the tarnished example of the old economy) couldn’t be more different cities when it comes to housing costs. Yet, after adjusting for income growth and mortgage rates and their influence on house-buying power, real house prices in both cities remain well below the pre-recession peak. So, really how different are these two markets?” With regard to affordability, Fleming said that the RHPI , which adjusts house prices for changes in consumer house-buying power, reveals a very different interpretation of how affordable housing is today. “Today, the national RHPI is 18% lower than it was in January 2000. This indicates that houses, after adjusting for the substantial increase in consumer house-buying power due to the large decline in mortgage rates, are 18% more affordable than they were 15 years ago. In fact, on a consumer house-buying power adjusted basis, house prices are as affordable as they were in 1997, even though the unadjusted price level is 110% higher today than it was then. Even expensive markets like San Francisco are only just passing their 2000 consumer house-buying-power-adjusted price levels, illustrating the impact of rising incomes in San Francisco and falling rates nationally.” We spoke exclusively with Fleming about how tight underwriting standards in the housing market woes might impact the rental market. GlobeSt.com: What impact will the constrained housing-market activity have on the rental market? Fleming: A good question! The constrained market is increasing upward price pressure, and what matters to a potential first-time buyer is the relative value of owning versus renting. Rising prices for owning a home makes renting relatively more attractive. Of course, it’s important to distinguish between those who choose to rent versus own, as opposed to those who are significantly rent burdened but don’t have the financial ability to choose homeownership . GlobeSt.com: What can be done to convince homeowners to put their homes on the market to increase inventory? Fleming: The best mechanism is price. As we are already seeing in the latest existing-home sales report, further price increases make the existing owner feel “wealthier,” which is historically an incentive to sell. GlobeSt.com: Do you foresee any loosening of the recent tight credit standards presumably caused by the “Know Before You Owe” rule? Fleming: Yes, the tightness in the jumbo market is really due to change that will be sorted out by industry participants over time. GlobeSt.com: What else should our readers know about where the housing market is headed? Fleming: I think the market is actually in a very good position, certainly relative to recent years. Prices and volumes will grow, eventually the demand driven by Millennials will arrive and have a very significant and positive impact, and modest and slow rate increases are not going to damage the market significantly. I am cautiously optimistic for this year and next.