Credit Scores May Hamper Housing Comeback

Taken from The Wall Street Journal

By Phil Izzo

Homeownership is potentially out of reach for nearly a third of Americans, according to a new report that highlights the difficulties in the housing market in the wake of the Great Recession.

Bloomberg News

Potential home buyers may be among the hardest hit by the recession.People with a credit score below 620 who went searching for a loan were unlikely to receive even one quote, according to real-estate web site Zillow.com, even if they offered a down payment of 15%-25%. Zillow notes that 29% of Americans has a credit score this low, according to data provided by myFICO.com.

“Today’s tighter credit is a predictable response by banks after the foreclosure crisis, but also keeps a cap on housing demand, which is important for the greater housing market recovery,” said Zillow chief economist Stan Humphries.

While banks may be right to try to avoid repeating mistakes made during the housing bubble, an over-reliance on credit scores could create problems for the real-estate market. Banks shouldn’t be giving mortgages to borrowers who can’t afford to pay them back, but if people with sizeable down payments and solid sources of income are being turned down because of credit scores, that’s not healthy, either.

Many factors influence credit scores. A temporary spell of unemployment and the resultant hardship can easily push them down. According to a new report from the Pew Research Center, the majority of Americans may find themselves in this situation. Pew separates its respondents into two groups, one that “held its own” — 45%, a number similar to myFico’s estimated 47% of Americans who have the best credit scores (over 720) — during the recession and another that “lost ground” — 55%.

The Pew report’s demographic breakdown may be even more troubling for housing. Those who “held their own” tended to be older people who already owned homes. Real Time Economics recently noted a potential “shadow demand” for housing from people who postponed plans to form new households in the wake of the recession, but that pool of potential homeowners was also more likely to have lost ground during the recession. According to Pew, 69% of people age 18-49 and 60% of those 30-49 lost ground.

It’s likely that those groups, who are the most likely first-time and move-up home buyers, took a hit to their credit scores during the recession. Zillow’s data indicate that even if they’ve recovered from the worst, the may not be able to get a mortgage, and if they do, they also are more likely to face higher interest rates.

Mortgage hike and housing slump is no disaster

By Michael Taube Last Updated: July 21, 2010 12:02pm

GTA resale home transactions for June were down 23% from last year’s level — no surprise, as the real estate market has been saturated with overpriced homes, high volume of sales, and a wide variety of houses available for purchase for some time.

Toronto had to go through a real estate correction — not only because this is the way the market works, but also because asking (and final sale) home prices were out of whack, to put it mildly.

With housing rates falling, some people are concerned mortgage rates will start to rapidly increase — with Tuesday’s quarter-point hike being just the start.

The thinking is banks will need to hike 1-5 year mortgages to make up for the shortfall in sales. This will lead to more home defaults and foreclosures, reduce investor confidence, and create a drain on our economy — just like what happened in the U.S.

That’s what some people think. I’m not one of them.

I believe mortgage rates will gradually increase over the next year or two, but not as high as some fear.

Long-term mortgage rates (three years and up) follow the bond market. If bond yields are high, banks will usually spike mortgage rates to make up for funding costs. If bond yields remain low, mortgage rates also remain low.

Meanwhile, the correction in a real estate market does not mean market collapse. A repeat of the U.S. mortgage meltdown won’t happen here.

The subprime mortgage crisis was, in former U.S. Federal Reserve chairman Alan Greenspan’s view, “an accident waiting to happen.”

He’s right. It was a preventable accident. High-risk loans given to people with lousy credit was a bubble waiting to burst.

The late department store tycoon Marshall Field had a simple motto, “Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”

That’s what happened in the U.S. While we blame “greedy” businessmen, “arrogant” government officials, or “dim-witted” low-income families for this financial mess, everyone had their fingers in the pie — and enjoyed the filling a bit too much.

In Canada, we don’t offer subprime mortgages to potential clients. Most importantly, credit checks matter.

If you don’t have sufficient personal income or assets, you ain’t getting the deed to the house.

As well, the Canadian economy continues to chug along. According to Statistics Canada, 93,000 new jobs were created in June, and most jobs lost during the recession have now been recovered. As long as our economy remains on track, real estate will not collapse in Toronto.

It’s up to federal politicians — and, to a lesser extent, provincial and municipal politicians — to ensure economic growth remains a priority so the real estate correction doesn’t become a real estate collapse.

But it’s also up to voters. If pro-business and pro-development forces are in charge of our political futures, the economy should remain on solid footing, bond yields should remain low, and mortgage rates should remain stable.

If not, the future of real estate in our fair city could be up in the air.

— Taube is a former speechwriter for PM Stephen Harper. His family has been involved in mortgages for more than 50 years

Drop in home sales may be sign of peak

The Toronto Real Estate Board said sales in June were down 23% from a year ago, leaving activity for the quarter up 1% from the same period a year earlier.

Garry Marr, Financial Post · Tuesday, Jul. 6, 2010

Existing home sales dropped sharply in Canada’s two most expensive markets, a further indication that the real estate market may have peaked.

The Toronto Real Estate Board said sales in June were down 23% from a year ago, leaving activity for the quarter up 1% from the same period a year earlier.

“We experienced a record number of existing home sales during the first half of 2010 but these sales were weighted more towards the beginning of the year, said Bill Johnston, president of TREB.

“The pace of home sales has moderated from record levels over the past two months with the prospect of higher mortgage rates.”

In addition to the fear of higher mortgage rates, the housing market was impacted earlier in the year by new mortgage rules that made it tougher to borrow.

The real estate industry has said many customers simply pushed forward their purchase to beat the new rules, predicting slower sales through the spring.

The industry is also now dealing with the impact of the harmonized sales tax, which was introduced in British Columbia and Ontario on July 1. Consumers trying to beat that tax — which will be newly applied to services such as real estate commissions — are said to have pushed their purchases forward, which will deprive the summer and fall of a number of sales.

Vancouver’s market is also feeling the brunt of the new real estate reality. Sales in Canada’s most expensive market were off 30.2% in June from a year ago, the Real Estate Board of Greater Vancouver said earlier this week. President Jake Moldowan noted June 2010 sales are still up 22.6% from 2008 recession levels.

The slowing market appears to be a phenomenon right across the country with Calgary also reporting last week June sales were off about 42% from a year ago. June sales were 16% from May alone.

So far, the drop in demand has not hit prices dramatically, but coupled with increased supply, the double-digit year-over-year price increases we saw for most of 2010 have ended. The average sale price of a home in Toronto last month was $435,034, an 8% increase from a year earlier.

“With more to choose from in the second quarter, many home buyers have been making less-aggressive offers. This has resulted in less upward pressure in the average selling price,” said Jason Mercer, senior manager of market analysis for TREB, who said price increases will remain in single-digit territory for the rest of 2010.

New listings continue to put pressure on the Toronto market. New listings were up 13% in June from a year ago while total active listings climbed 28% during the same period.

In Vancouver, the total number of properties for sale is up 32% from a year ago. Prices in Vancouver were up 11.8% from a year ago with the board’s housing price index benchmark price climbing to $580,237 from $518,855. In Calgary, the average price of a home sold in June was $483,240, an increase of 8% from a year earlier.

The existing home market may get a break from the fact it looks likes builders are ramping down on construction. Statistics Canada said the value of building permits applied for in May was off 10.8% from a month earlier. Housing permits were off 4.4% from a month earlier.

“If there is hope for house prices in Canada, it lies in curtailing supply. That’s where any room for optimism lies in an otherwise bleak report that displayed widespread losses in value and volume terms within both the non-residential and residential categories,” said Derek Holt, an economist with Bank of Nova Scotia.

Financial Post

Property Values Could Plummet If the Canadian Real Estate Bubble Bursts

The real estate market in Canada has performed well over the last few years but it could have resulted in a bubble that is ready to burst.
The Canadian residential sector has continued healthy despite the economic mortgage crisis that affected the US, and the forecasted nationwide real estate market bubble has yet to materialize. The Canada Mortgage and Housing Corporation's (CMHC) program to stimulate credit by approving high-risk mortgages had concerned experts because it pushed the ratio of housing values to a 7.4:1 ratio, which was over 50% more than American consumers experienced prior to their housing bubble collapse. As a consequence of the CMHC's policy shift, the average Canadian family debt experienced a 9.3 percent increase in only one year.

Some analysts, like the 84-year-old investment advisor Stephen Jarislowsky -- who has an estimated worth $1.85 billion -- said earlier this year that he believed that the strategy used by the CMHC would backfire. Jarislowsky flatly contradicted the statements made by Finance Minister Jim Flaherty claiming that the indications did not point to a future real estate bubble. Jarislowsky firmly believed that the government's programs were not going to strengthen the economy. During a phone conversation, he said that the CMHC "..has created the reverse effect of what was acceptable. " They have basically persuaded people to buy houses based on cheap mortgages. Evidence can be witnessed in the City of Toronto where the value of Toronto properties as increased by quite a bit over the years as purchasers rushed into the market.

An in-depth study of the Canadian real estate sector performed by the Wall Street Journal in February 2010 pointed out that the 2008 failure of the Lehman Brothers in the U.S. could have built a housing bubble backfire if the Canadian government did not change their lending tactics. But as early as January 2010, a representative of the Bank of Canada explained that "if the Bank were to increase interest rates to cool the housing market" that the result would be like "dousing the entire Canadian economy with cold water, just as it comes out from recession".

The Canadian Real Estate Association numbers that were released for the first half of 2010 does show that the start of the recession in 2008 translated into a sharp decline in residential real estate sales. But this did not last long, and the recovery has not been as dramatic as anticipated. Even though the May 2010 sales figures indicated a 9.5% drop, the year-over-year price increases actually balanced it to 8.4 percent. This stabilization in the housing market is a normal result of buyers not being quite as anxious to invest as the supply of properties increases and prices climb slowly, but proportionately.

Pascal Gauthier of the Toronto-Dominion Bank mentioned that the bubble scenario "made a lot of people nervous," fearing a huge crash comparable to the 30% decline in U.S. housing values. This summer, however, he is observing that the short-term elements that elevated property values resulted in only a modest decline in a clearly overpriced market and the attitude is a "180-degree change from six months ago". Gauthier believes that the national average may feel a 7 percent drop, but that the areas such as Toronto and Vancouver will bear the brunt of that decrease, and some areas such as The Prairies and Maritimes could even begin to realize gains by the end of the year.
By Stefan Hyross
Published: 7/13/2010