The U.S. housing recovery has left many borrowers behind, as stricter lending guidelines make it virtually impossible for certain segments of the market to obtain financing.
The U.S. housing finance system faces a conundrum. On the one hand, consumers and businesses have enjoyed record-low borrowing costs since the 2008 financial crisis because the Federal Reserve has been unable to raise interest rates. On the other hand, regulators intent on stemming risk from the market have placed significant barriers on borrowers with “irregular income” or less than ideal credit. This segment of the market doesn’t just refer to people with bad credit, but entrepreneurs and small business owners who are generating so much of America’s wealth.
This bifurcation has been reflected in the stop-and-start pace of the housing recovery since the economic downturn. Home sales hit a bit of a snag in 2013 as mortgage rates began to rise. Housing starts and home re-sales have since expanded sharply thanks to historically low mortgage costs and an accelerating labor market. While the housing recovery has hit its stride in 2016, only well-off borrowers and home builders have benefited. For millions of other Americans – like those who can’t produce a steady bi-weekly pay stub – have been essentially locked out.
Four years ago, Sean Dobson of Amherst Holdings set out to help borrowers with middling credit obtain financing to buy homes. He soon realized that the regulatory hurdles destroyed his business model. Instead, his company snatched up thousands of homes across the country and rented them to people who could have been his borrowers had credit restrictions not been so tight.
Regulators have focused on “lowering the cost of capital instead of increasing the availability of credit,” Mr. Dobson said in a story that was featured in a Dec. 4 article for The Wall Street Journal.
While rents provide a good source of revenue and contribute positively to economic growth, real estate is generally the biggest purchase American households make. The economic footprint remains long after closing as buyers spend thousands on home furnishings, appliances and related items.
As a result, residential real estate investment remains 22% below its prerecession level, according to the St. Louis Fed. By comparison, spending on durable goods (i.e. manufactured items meant to last three years or more) is 21% above prerecession level.
America’s growing credit gap may also be partly responsible for below-average growth in new home sales, which represent less than a tenth of the market. New home sales are running about 30% below their long-term average. Sales activity in this category has been especially volatile at a time when housing should be surging on record affordability.
While the regulatory regime makes the housing finance system less susceptible to another massive subprime mortgage crisis, it has also weighed on overall homeownership, which is currently at its lowest in 50 years.
Dwindling homeownership has also cost the economy much-needed growth and created greater disparity between wealthy households with access to cheap credit and those left out in the cold. After all, rising equity is one of the major sources of wealth in America. This is lost on the millions who simply cannot enter the market under the existing regulatory regime.
Experts are also quick to caution that we are not comparing the current regulatory environment to the one that produced the housing crisis. As Pacific Investment Co notes, up to 1.4 million Americans who would have been eligible for a mortgage back in 2002 couldn’t get one today. It’s important to compare apples to apples, and nobody is suggesting we go back to pre-recession style lending.
These trends are expected to continue so long as access to credit is limited to a narrower slice of the economy. Combined with changing demographics and less inherited wealth, more stringent credit rules are expected to keep the homeownership rate firmly capped below two-thirds – unless Washington’s rules change.
This article was written exclusively for GoRion.