Joe Nocera is concerned about the state of the US real estate market. Unemployment and a huge "shadow inventory" of as-yet-unforeclosed-upon homes with badly delinquent mortgages are making people afraid to buy. Meanwhile, those who are foolhardy enough to seek loans are having trouble getting them:
So that is what it looks like for the prospective borrower. Now look at it from the lender's perspective. Chastened by the excesses of the bubble, mortgage lenders have swung hard in the other direction, becoming excessively, almost insanely, conservative. They demand high FICO scores. They won't lend to anyone who is recently self-employed -- even if the potential borrower has socked away a lot of money in the bank, or is making a good income. They won't count income from capital gains.
"I have wonderful people in my office every day who would have qualified for a loan prior to the bubble" but now can't get one, Mr. Zitting said. Mr. Barnes said: "Underwriting standards are vastly tighter than any time in my lifetime. It is choking off buyers."
Here's the strangest part, though: it is really not the lenders themselves who are imposing the most draconian of these tight new underwriting standards. Rather, it is the federal government. That's right, the government.
At the same time that the administration was offering a hefty tax credit to spur home sales, the government's wholly owned subsidiaries, Fannie Mae and Freddie Mac, were imposing rules that made it increasingly difficult to buy a home. And Fannie and Freddie have the ultimate say these days because without their guarantee, Wall Street securitizers won't buy a mortgage from a bank -- because Wall Street is just as fearful as every other participant in the market.
"The government right now is insuring something like 85 to 90 percent of the country's mortgages," said Daniel Alpert, a managing director of Westwood Capital. And given the enormous losses Fannie and Freddie were saddled with during the financial crisis, they are in no mood to take risks, not even on borrowers who are normally considered creditworthy. So they are saying no a lot more than they used to -- even though this is having a terrible effect on the housing market.
It's even become nearly impossible for well-heeled investors to buy rental properties. This is no small matter. At the peak of the bubble, the rate of homeownership approached 70 percent. Now it is falling toward 65 percent -- which is more or less where it was before all the housing madness of the last decade. That means that millions of Americans who were briefly homeowners need to become renters again. They need a place to rent.
But somebody has to buy the homes they are leaving behind and turn them into rental properties. The most likely buyer is a professional investor who purchases rental properties for a living. Yet, absurdly, government rules have made it exceedingly difficult to make loans to investors who want to buy up rental properties. This only adds to the shadow inventory.
Nocera's word choice seems to imply that he thinks the government is erring by being too tight, allowing the housing market to sink unnecessarily. I read the same statistics and I am dismayed by the extent to which the government is propping up the housing market, keeping prices artificially high. Why does the government have such an enormous share of the mortgage market? It seems it must be because the money is too cheap.
Nonetheless, my experience in the mortgage market has been that lenders were willing to offer me too much money, not too little. The underwriting standards have been very tight, in terms of the paperwork I have had to produce--in order to use money that we received as wedding gifts as part of our downpayment, for example, I needed to produce a copy of our license, an invitation, and the announcement from the Times. But in terms of the money they were willing to lend on the income we verified, the standards were absurd. We're borrowing less than half what the bank was willing to offer. And this was our staid, sober credit union, not some fly-by-night outfit.
Does that mean that the housing market has much farther to fall? On the one hand, the government interventions are disturbing. On the other, I note two things. The first is that the time from top-to-trough of housing bubbles seems to be about three years, historically. Is history a good guide for the current situation, with the massive government support? I don't know, but I can't discount it entirely.
The second is that the catastrophic pessimism now visible in news articles and neighborhood conversations is often taken to be a sign that a market has "capitulated"--i.e., bottomed. Which is to say that just as prices are apt to be highest when everyone is expecting them to continue soaring forever upwards, prices are apt to be lowest when everyone is forecasting further declines.
Of course, having just bought a house, I'm naturally going to be tempted to fool myself on this score. I'm trying, although not entirely succeeding, to ignore the question of home equity. Buying is a good substitute for renting for us, which is the only thing that should matter.
Which doesn't mean that I won't be gulping hard when we finally sign those papers.