Many believe that loose mortgage lending practices sparked the housing downfall of 2008. Lenders were liberal with their purse strings, doling out loans to high-risk buyers.
Washington officials are trying to make sure similar problems don’t happen again. But the new efforts at reining in the industry could boomerang, according to U.S. News & World Report.
“The pendulum has swung from way too crazy to too conservative,” Sam Khater, senior economist at CoreLogic told U.S. News. “That’s human nature. The rules are aimed at protecting consumers from hurting themselves.”
The stringent policies of the Consumer Financial Protection Bureau, the agency overseeing lending practices, could potentially be cutting off many homebuyers who would otherwise qualify for a home loan. That means fewer buyers in the market, and a drop in sales for the housing industry.
According to the new rules, borrowers would be disqualified from a new loan or refinancing option if their household borrowing is over 43 percent of their income. The rules also make it easier for consumers to sue lenders if the loans go bad. That option could make lenders even more wary about approving loans. Lenders are already anxious about loan approvals, given the close scrutiny they are under. This would only increase their anxiety and put buyers at a disadvantage.
Verification of job history and employment are another key criteria among the new rules. With many people losing jobs during the recession and having a break in employment, this could hurt a big segment of the population. First-time buyers, a key segment of the industry, would probably find it harder, since many of them are saddled with student loan debt, which would put them over the 43 percent debt-income threshold.
First-time buyers take note. A shortage of vacant lots could increase builder costs, making new homes expensive for buyers. According to USA Today, in 27 leading markets, the average price of finished lots skyrocketed 40 percent in the second quarter compared to a year-ago period. In some markets, the increases were even more pronounced.
Finished lot values increased an astounding 87 percent in San Francisco and Oakland, 75 percent in Atlanta, and 70 percent in Las Vegas.
David Crowe, chief economist for the National Association of Home Builders, said that the spikes are signs that the market is making up for the fall it took during the recession, when lot prices plummeted with a slowdown in demand.
Finished lot prices account for almost 22 percent of a new home’s price, Crowe told USA Today. A higher lot price would mean builders handing off the difference to the buyer.
All regions reported modest to moderate growth in the housing sector this summer, according to a Federal Reserve report released this week.
The housing market continued to gain momentum along with consumer spending this summer, a sign that bodes well for the industry.
In New York, sales of condos and co-ops were unusually strong over the summer, said USA Today. In Cleveland, existing home sales had an impressive jump when compared to a year ago.
According to the Fed, contrary to popular belief, rising home sales and mortgage rates have not dampened sales, but helped accelerate more activity in the market.
“Many fence sitters were prompted to commit to purchases,” the Fed said, according to USA Today.