One Market Perspective
The (Housing Credit Affordability Index) HCAI measures the percentage of owner-occupied home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.
The HCAI has dropped 13% since Q4 2019. Is it also noted in the same article that, “Significant space remains to safely expand the credit box.”
Another recent article in the WSJ explores the relationship between lenders and borrowers at this point. The fact is lenders have tightened their requirements to the point that it might stall recovery in the housing sector. Forbearance is now showing up on borrowers’ credit, even if repaid, further limiting their ability to either refinance or obtain a new loan.
For Freddie Mac and Fannie Mae, the challenge is Congress passed legislation allowing borrowers to postpone payments for up to a year. 4.75 million people have taken advantage of this forbearance option leaving the secondary market underfunded.
Builders are responding to this liquidity crunch, by not applying for permits. The average number of permits issued since 1960 is approximately 1,356,000. There were only two periods when over 2 million permits were issued in a given year, once before the 1973 oil embargo and the other before the 2008 Great Recession. Early January numbers were looking good at 1,536,000 permits issued. But since the beginning of the year, housing permits issued have dropped 31%.
Conforming lending rates have also gone up and are in the range of 3.75%.
The difference or spread between the 10 year Treasury and a 30-year conforming mortgage has jumped from 1.86% in January to 2.54% as of May 20th.
With the maximum amount of conforming loans for the Bay Area at $765,600, this increased spread means over the life of a 30-year loan borrower will pay an additional .68% or $80,960.61 in interest.
Since the Government does not back jumbo loans, this data is not included, but jumbo rates historically are .25% to .5% higher than conforming loans.
The impact of this information is housing starts are slowing. Historically, housing is in the range of 15-20% of the GDP. This alone could account for a 6% decline in overall GDP for the nation based on the current numbers this year. What this means for home buyers and sellers is fewer qualified buyers, but also fewer options for buyers. But, unlike real estate in many parts of the country, which are seeing price reductions, the Bay Area’s lack of inventory is resulting in sustained housing prices which we can expect to continue for some time.
As a final thought, it will be interesting to see if commercial real estate owners convert their holdings to residential properties. This could change everything.