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Tight Credit Standards Restrict Buyer Activity

Published on Monday - November 11, 2013

The recovery of the housing sector has rewarded investors who remained patient through one of the most significant economic depressions in U.S. history. However, the progression of the real estate industry has yet to favor the majority of “regular buyers.” Essentially, tight credit standards continue to restrict single and first-time buyers from actively participating in the market. According to a new survey from the National Association of Realtors (NAR), even financially qualified buyers are not guaranteed access to the loans they need.

Tight credit restrictions, resulting from the recent bubble crisis, have taken a toll on specific populations. In particular, single and first-time buyers are finding it increasingly difficult to acquire a mortgage. According to the study, the overall market share of single buyers fell from 32 percent in 2010 to just 25 percent in today’s market.

“Single homebuyers have been suppressed for the past three years by restrictive mortgage lending standards, which favor dual-income households who are more likely to have higher credit scores,” noted Lawrence Yun, chief economist for the Realtors.

Single homebuyers, however, are not alone in their struggle. First-time buyers have simultaneously been flushed from the housing sector. First-time buyers usually represent approximately 40 percent of the market, but the NAR survey acknowledged a 2 percent drop. While the survey places first-time buyers at a 38 percent share of the market, the Realtors’ September home sales report suggests that number could decline even further. First-time buyers bought just 28 percent of the homes sold in the month.

This is particularly disturbing, considering the importance of first-time buyers to the current recovery. Without the presence of first-time buyers actively participating in the housing sector, there is a significant void in the move-up market. While investors using cash have done a good job at replacing them, there is still concern as to the direction their participation is trending.

Aside from the tight credit standards we have grown accustomed to, negative equity continues to neglect buyers and sellers the opportunity to participate in the market. According to a survey by Redfin, 43 percent of the sellers in the market are disappointed by the interest they are receiving in their homes. As a result, the percentage of sellers who thought today’s market provided a good opportunity to sell decreased from 48 percent in the third quarter of 2013 to 34 percent right now.

Despite these factors, in association with a downward revision of expected sales, analyst Paul Diggle acknowledges that there are still reasons to remain positive. “There are still reasons to be optimistic about the medium-term outlook for existing home sales. After all, even after the recent increase, mortgage interest rates remain low and affordability and valuation metrics are favorable,” he said.

In addition to low mortgage interest rates, encouraging news remains on the horizon. The need to participate in the housing sector is fueled by the desire of homeownership. Simply put, many Americans dream of owning a home and will do what they can to make it happen. In fact, desire alone was enough to make 60 percent of first-time buyers and 12 percent of repeat buyers purchase their current house. Furthermore, of those who purchased a home in the last year, 80 percent acknowledged that it was a good investment.

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