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Today, there is another reason to be optimistic about the housing market in the coming months. The economic analysis firm, Capital Economics, has released a report that forecasts the housing crisis to end later this year. Their prediction is primarily based upon evidence that lenders are finally beginning to ease the credit standards required to obtain a mortgage.
One such standard is the FICO credit score. Currently, the average credit score needed to attain a mortgage loan is 700.
Prior to the economic crisis the required score was lower, and during the crisis, lenders quickly raised the requirement. According to a Fed Senior Loan Officer Survey, the required score has finally stopped rising, and has actually been stable for the past few quarters.
There is more good news. Other market indicators are signifying not just stability, but an easing in lending requirements. For example, banks are now lending amounts up to 3.5 times the annual income of a borrower. Recently, this factor had been as low as 3.2 times.
Additionally, banks are increasing their maximum “loan-to-value” (LTV) ratios. That ratio is currently averaging 82% nationally, up dramatically from the low of 74% in 2010. Capital Economics calls this “the clearest sign yet of an improvement in mortgage credit conditions.”
However, there is evidence that homebuyers are still having trouble meeting the current requirements, as
Capital Economics noted that recently 8% of contract cancellations were due to the potential buyer not qualifying for a loan.
While it is too early to forecast an imminent rise in housing prices from this data, it is definitely safe to say that the easing of credit requirements that are underway will allow more people to buy a home. That can only help the market, as the new wave of buyers will help to reduce the current supply of homes that are for sale.
