Market News Archives - Blue Dot Real Estate

Lending Standards: Too Loose or Too Tight?

Lending Standards Too Tight or Too Loose?

Are We Headed for Another Bubble?

Between 2004 and 2007, lending standards were loosened significantly, bringing previously unqualified buyers to the housing market. These loosened standards, coupled with sub-prime lending, led directly to the housing crisis a decade ago.

We can see that the current market has recovered from the market crash and then some. Home appreciation has risen year over year, and that appreciation coupled with tight inventory has given rise to the current real estate boom. We know the contributing factor in the crash was risky mortgages with high rates of default. What’s different today? Tighter lending standards and the Qualified Mortgage Rule.

According to the MCAI (Mortgage Credit Availability Index) with a benchmark set at 100 in 2012, higher numbers indicate a loosening of lending standards, and lower numbers the opposite. April 2018 MCAI was unchanged from March, at 177.9. Broken down, conventional credit increased driven by an expansion in jumbo credit. Government MCAI, however, fell 1.4 percent, indicating that at least in that sector, lending standards are tightening.

The Interest Rate Factor

On June 13th, 2018, the Federal Reserve raised rates for the 2nd time this year – from 1.75% to 2% – and we know this affects mortgage lending rates as well. It costs more to borrow money now. While interest rate increases often lead to a rush in mortgage applications, how many of those applications are approved? What does it take to be a prequalified buyer in today’s market?

So, Lending Standards: Too Loose or Too Tight?

Take a look at this chart from the Mortgage Bankers Association’s graphic below. A graphic representation shows that we are nowhere near the standards that caused the housing crisis. In fact, while the index has risen recently, credit standards are still quite tight, leaving a segment of qualified buyers out of the market.

Bottom Line:

With recent reports of the skyrocketing cost of rent, further loosening of lending standards would serve a segment of potential buyers with lower credit scores but with sufficient income to cover payments. The Consumer Financial Protection Bureau is in the midst of reviewing the Qualified Mortgage Rule, determining whether to loosen some of the consumer protections instituted by the Dodd-Frank Act. With fewer restrictions on lenders and borrowers, the potential for bringing qualified home buyers to the market increases. It is possible to balance consumer protection and qualify for a mortgage simultaneously. That’s what we’d like to see – healthy buying AND lending conditions.

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What Happens to the Housing Market When Interest Rates Rise?

The Federal Reserve raised interest rates a quarter of a percentage point on June 13th, 2018, from 1.75 percent to 2 percent, an indication of confidence in the strength of the economy. As such, mortgage rates will likely rise as well. According to Bankrate’s weekly survey of large lenders, the benchmark 30-year fixed-rate mortgage last week was at 4.7 percent and we’re likely to see that increase after the June announcement. While we all like to see a strong economy, we also know raising interest rates creates some changes in consumer behavior. So, what happens to the housing market when interest rates rise? In the short term, here’s what we typically see:

Consumers feel more pressure to lock in interest rates, so applications typically rise.
A jump in offers and panic buying, tightening inventory.

What we see in the long-term when interest rates rise and how it affects the market is the real issue. A recent survey by Redfin found:

About one-fifth of consumers said 5 percent interest rates would cause them to move with more urgency to purchase a home.
More than a quarter of consumers, however, said that a 5 percent rate would cause them to slow their plans
Six percent surveyed said they would drop their plans altogether.

Where are we headed?

What Happens to the Housing Market When Interest Rates Rise?

Historically, we are nowhere near the record-high mortgage interest rates of the 1980’s, when rates hovered over 18 percent. Rates have decreased steadily since the early 1990’s. The latest rise does, however, mark a change in direction. With surging home prices already making affordability difficult, and inventory tighter than ever, the rise in interest rates will compound the problem. However, the rise in rates isn’t estimated to curb homebuying activity. With a positive economic outlook and more people working, feeling secure in their jobs, and bringing home more money, buyers are more likely to simply buy a less expensive home instead of opting out of the buying process. For many prospective homebuyers, the higher rates may speed up the decision to enter the market.

In the immediate future, the segment of the market most affected by the rate hike are homeowners with a HELOC. Every rate increase affects their payments and ultimately, their bottom line. Adjustable-rate mortgages are adjusted annually, so homeowners with these types of loans won’t feel the effect of the rate hike immediately, but multiple rate hikes throughout the year will increase their payments.

Keeping Current

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Seattle-Tacoma Area Market Trends

2016 saw Seattle-Tacoma area home prices steadily rising, and 2017 is shaping up to be no exception. What does that mean for investors, and what are the Seattle-Tacoma area market trends for 2017?

Seattle-Tacoma Area Market Trends

Seattle

Seattle market trends show an increase of $30,000, or 6%, in median home sales over the previous year. Competition for investment properties has taken an interesting turn, as Seattle has become the number one U.S. market for Chinese home buyers. These buyers tend to come in with all-cash offers, and that’s been contributing to the upward tick in home prices. Some of these investors are moving into the homes, but many are buying them and either renting them out or leaving them empty. The West Bellevue, Medina and Mercer Island areas have seen the biggest bubble, with home prices jumping 125% in the last five years.

That’s not to say there aren’t any lower priced homes to be found, the “deals” are going to be in other parts of King County, and don’t leave out the condominiums on the REO market as well.

Tacoma

Pierce County is a different market. Don’t count this South Puget Sound area out for finding bank-owned homes with profit potential. Tacoma real estate saw a 10-13% gain on median sales price (Aug 2015-Aug 2016) which far out-paced the national rate of appreciation. The city and surrounding areas offer some of the outdoor and cultural perks of closer-in Seattle, but without the Seattle housing price tag to go along with it. This makes the Tacoma area more affordable for those with moderate incomes. Rent rates in the same area rose nearly 40% over two years. For rent-weary potential buyers, Tacoma offers some starter-home gems.

Tacoma-Pierce County has also seen more out-of-state investors buying up homes in the area – up threefold since 2006 – the bulk of which are owned by investors in Texas. Because of the rapid appreciation in the area and the rising rents, these LLC’s are turning a healthy profit.

2017: Looking Ahead

Seattle and Tacoma look to remain very desirable markets in the coming year. And while predictions are that home prices will continue to rise, with a possibility of the trend cooling off over the next year, with gains being smaller than what’s been seen in the previous few years. However, it’s still a very hot market to jump into with investments looking strong for the near future.

FHA Mortgage Limits: 2017

While the Seattle-Tacoma area market trends lean toward investors, home buyers are still very much in the picture. The mortgage lending limits were updated by HUD for Washington State – it’s always a good idea to familiarize yourself with what’s changed. Take a look at the 2017 FHA mortgage limits on HUD.gov.

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