Affordable housing policy in the US is a mess. As I mentioned at the American Action Forum meeting on the future of the GSEs yesterday, the housing market today reminds me of the housing market from the 2000s … where home price growth was over twice that of earnings growth for most households. The credit market composition is different (e.g., fewer low-doc loans), but the ratio of home price growth to earnings growth is the same.
With local zoning and construction restrictions, it is difficult to provide “affordable” housing. The typical reaction from the Federal government and its agencies/enterprises is to expand the credit box (lower credit standards) to make housing “more affordable.” In reality, it only makes housing “more attainable” while at the same time making housing more costly.
By making home ownership more attainable in a restricted supply area (like Los Angeles), that only serves to make entry-level housing even MORE unattainable.
But enough of that (Washington DC is filled with rent seekers and is not likely to change).
For May, 1-unit starts grew 5% (good, but not good enough). But permits fell by 5% too.
There was a fascinating movie from 2012 about surfing Mavericks, a spot just north of Half Moon Bay in California, notable for 25-50 foot waves in the winter. Mavericks attracts the more risk-taking surfers.
But housing isn’t surfing. To adjust for the massive home price increases (think of waves), lenders are actually making it easier to paddle out to the big waves.
CoreLogic — Mortgage underwriting guidelines have loosened in the last couple of years. To expand the credit box to creditworthy borrowers, Fannie Mae began accepting mortgages with loan-to-value (LTV) ratios up to 97 percent in December 2014 and Freddie Mac in March 2015. To further expand access to credit, Fannie Mae raised its DTI ratio level from 45 to 50 percent in July 2017. DTI and LTV ratios along with the credit scores are three important factors in mortgage underwriting. This blog focuses on only conventional conforming (CC) home-purchase loans, which is a majority of the U.S. mortgage market.
The credit risk attributes of borrowers have shown dramatic variation in the last 18 years. Recent credit loosening policies by the GSEs have helped boost higher DTIs and LTVs. Figure 1 shows the share of new conventional conforming home-purchase loans with DTI ratio above 45 percent rose sharply after Fannie Mae’s move. The share, holding steady at between 5 percent to 7 percent from early 2012 up to Fannie Mae’s announcement, had reached 20 percent in Q1 2018. The average DTI ratio for CC home-purchase loans rose by two points from Q1 2017 to Q1 2018 to almost 37 percent.
Similarly, Figure 2 shows the share of new CC home-purchase loans with LTV ratio above 95 percent started to rise in early 2015 following the GSEs’ announcement. The share was less than two percent in 2014 but rose gradually and reached 9 percent in Q1 2018. The average LTV ratio for the home-purchase loans in Q1 2018 remained unchanged from Q1 2017 at 82 percent.
This, of course, is pro-cyclical lending (that is, as the waves get bigger, lenders try to send more people out into the waves). And with home price growth over twice that of hourly earnings growth for most American workers,
lenders are indeed chasing Mavericks.