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The Housing Market Needs More Than Low Mortgage Rates

The Housing Market Needs More Than Low Mortgage Rates

Wednesday, 20 November, 2019 - 08:00
A home for sale in Cambridge, Mass. Housing prices have risen faster than wages in much of the country in recent years. AP

The Federal Reserve is hoping that its latest interest-rate cut will help keep the economy safely at cruising altitude. But don’t expect it to provide much of a lift to the housing market.

Housing is one of the pathways by which Fed policy produces results. When the central bank cuts interest rates, it encourages people to buy houses (since mortgages are cheaper) and builders to ramp up construction (since demand is strong and borrowing is easier). Those decisions then ripple through the economy, as people buy furniture, builders hire workers and brokers cash their commission checks.

But housing isn’t the engine it once was. The sector is a smaller part of the economy than before the financial crisis, and a smaller share of Americans are homeowners. And with rates already low, it isn’t clear that a further cut by the Fed will do much for housing — if it lowers mortgage rates at all. (More about that in a minute.)

Interest rates still matter for housing. The Fed’s first two rate cuts this year helped stabilize the housing market, which had been heading for a major slump. On Wednesday, the Commerce Department said that construction added to gross domestic product in the third quarter after six quarters of contraction. And lower rates could give another jolt to a refinancing boom that has injected billions of dollars into the economy in recent months.

But few economists expect the housing market to take off in response to this week’s rate cut, because rates aren’t what was holding back housing in the first place. Instead, they point to other factors.

Interest rates don’t matter if no one will give you a loan in the first place. And a lot of would-be buyers are in that situation.

After the housing bubble burst over a decade ago, banks and other financial institutions became far more cautious in their lending, partly because of new federal rules meant to discourage risky loans. No one wants a return of the bubble-era “liar loans,” for which borrowers were allowed to state their income without verification. But some argue that the pendulum has swung too far the other way.

The typical home buyer today has a FICO credit score of 741, compared with 700 before the housing crisis, according to data from the Urban Institute. Hardly any buyers have a score below 650. Other measures of affordability likewise show that lending standards have loosened a bit in recent years but remain tighter than in the early 2000s, before the subprime lending boom.

“There are a lot of people that have the income to afford their payments, they could be responsible homeowners, but they may have a lower FICO score, they may have a smaller down payment, and that really holds them back,” said Melissa Stegman, a lawyer at the Center for Responsible Lending, an advocacy group.

Jewell Handy has a steady income as a teacher, money for a down payment and even a history of successful homeownership. But when she decided to buy a house for herself and her mother in Houston this summer, she discovered that she couldn’t get a conventional mortgage. The reason: a credit score in the mid-600s because of an old issue with a student loan.

Ms. Handy eventually got approval for a more expensive loan through the Federal Housing Administration. But with a week left before the sale is scheduled to close, she is still fielding paperwork requests from her lender, and she isn’t sure the loan will go through.

“They’re somehow not confident in my finances, but I don’t really understand why,” she said.

Tight lending standards disproportionately affect African-Americans like Ms. Handy. Black workers earn less on average than white workers, and they are less likely to have well-to-do family members who can help with a down payment. The homeownership rate among black Americans tumbled during the housing market’s collapse and has barely recovered, even as whites and other racial groups have made progress.

Glenn Kelman, chief executive of the online brokerage Redfin, said the combination of low interest rates and tight lending standards was exacerbating existing economic divides.

“Right now, money’s really cheap, but you have to have a good credit score to be able to access it,” he said. “It’s been a bonanza for one group of people, the people who have always been able to get credit.”

It’s hard to find a house to buy (at least one you can afford).

Housing prices have risen faster than wages in much of the country in recent years. And many cities, particularly on the coasts, are in the midst of a full-blown affordability crisis. In cities like San Francisco, Seattle and Boston, the median price of a home listed for sale is well over half a million dollars, according to the real estate site Zillow, and even starter homes can top $300,000 — if there are any available.

At those prices, a modest dip in interest rates will hardly make a difference, said Susan M. Wachter, a professor of real estate at the University of Pennsylvania.

“This interest-rate decline will not do it — it will not turn these potential owners into buyers,” she said.

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