Garnet Capital Advisors Blog

Lending standards could potentially weaken as housing prices continue to increase, Lindsey Piegza, chief economist for privately-owned brokerage Sterne Agee, stated recently.

She noted that home values are appreciating more quickly than wages, which is resulting in fewer consumers being able to purchase these properties, HousingWire reported.

Many borrowers rely on government programs to buy real estate, but rising home values could price them out of the market. In addition, would-be homeowners are having a hard time obtaining financing for properties that are above the program limits.

Homeownership rate drops to almost 20-year low
There is evidence to support the economist's concerns about affordability, as the homeownership rate recently fell to its lowest in almost 20 years during the first quarter of 2014, according to Bloomberg.

The fraction of people who own their living space dropped to 64.8 percent during the three-month period. This represented the smallest portion holding this status since the second quarter of 1995, the media outlet reported.

"The homeownership rate is held back by slow job growth, tight mortgage credit and declining affordability," Jed Kolko, chief economist of San Francisco-based property-listing service Trulia Inc., told the news source in an interview before the report was released. "We'll see it stay around this level for some time."

Economist predicts likely drop in lending standards
While homeownership has fallen to its lowest in nearly 20 years, Piegza cited figures from the S&P/Case-Shiller composite index of 20 metropolitan areas, stating that home prices surged 12.9 percent in February from the same time last year, according to HousingWire. In addition, the index containing 10 cities gained 1.31 percent year-over-year.

"Going forward, if home prices continue to rise, there are a limited number of options to offset the rising cost of purchasing a home: 1) an equally sizable increase in wages or 2) a marked reduction in credit restrictions," she asserted, the media outlet reported. "Given the significant slack in the labor market, the latter option of easing lending standards appears to be the most probable and fast-acting solution."

It is worth noting that government agencies such as the Federal Housing Administration, the U.S. Department of Veterans Affairs, Fannie Mae and Freddie Mac currently provide loans for most of the nation's mortgage market. These organizations might have to lower their lending standards if Piegza's prediction is accurate.

There many be some evidence that credit is already becoming looser, as Mortgage Bankers Association data reported by Albuquerque Business First showed that in the last 12 months, more than 1 in 6 mortgages had down payments below 10 percent.

In the event that this trend continues, it could impact loan sales by providing a greater supply of non-government mortgages that have a smaller down payment and potentially adjustable rate terms. Financial institutions that want to get involved with these transactions might consider contacting Garnet Capital Advisors, which has substantial experience in these sales.