Tighter Lending Standards May Choke Market, Fuel Home Ownership Decline

By Kyle Chezum Updated on 1/31/2011

1/31/11

The home ownership rate in the US peaked above 69% in 2004, an almost 7% increase over ten years.  Today, the rate has fallen to about 66% and is still dropping, the US Census Bureau reports.  The rate is now the lowest it’s been since 1998, and John McIlwain, a noted economist with the Urban Land Institute, expects the ownership rate to decrease another 4% in the coming years.

Both Democrats and Republicans are pushing measures that will make it more difficult for borrowers to obtain mortgages.  Federal Housing Administration commissioner David Stevens claims that too many mortgages were provided to borrowers “who clearly should not have gotten them.”  The new regulations in development will help lenders better screen applicants.  Stevens, like McIlwain, predicts a continued drop in homeownership.

Increased regulations will likely meet with little resistance from lenders, who are now highly consolidated and actually generating higher profits on each loan originated due to decreased competition.  The past two years have seen nearly 300 bank failures.  Many of these failed banks have been bought by larger institutions.  During the bubble, banks typically lost about $2,000 per mortgage origination and generated profits through interest.  Now, even originations have turned profitable.

The tighter borrowing measures in development will include higher down payment requirements, higher credit score requirements, and higher interest rates and origination fees.  In other words, the risk of borrowing will remain with the borrowers in greater amounts than in previous years.

Still, a startling 18% spike in home purchases in December gives some economists hope, including Mark Rogers, an economist with Econoday.  “Good news is good news.  The buyer rush is likely tied to December's jump in mortgage rates which encouraged potential homebuyers to quit sitting on the fence and commit to a purchase.”  Rates have since dipped again but are trending upward overall.  This may lead to another increase in home purchases in January.