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.

Interest rates expected to edge up

Bank of Canada announcement at 9 a.m. ET

Last Updated: Monday, July 19, 2010 2:23 PM ET
CBC News

The Bank of Canada, weighing strong domestic growth against weakness internationally, will likely raise its key lending rate by another quarter of a percentage point Tuesday morning, economists say.

That would bring the central bank's overnight lending rate to 0.75 per cent.Bank of Canada governor Mark Carney is shown during a panel discussion last month at the International Economic Forum of the Americas in Montreal. (Graham Hughes/Canadian Press)
Increases in the overnight lending rate generally lead directly to increases in lines of credit rates, variable-rate mortgages and other demand loans.

All 12 primary securities dealers expect the central bank to announce a quarter percentage point hike. A survey of 20 economists by Bloomberg found similar unanimity.

If that rate hike does materialize, it would be the second straight hike by the bank, which had left its benchmark lending rate at a rock-bottom 0.25 per cent for more than a year to provide a shot in the arm to a struggling economy.

Canada's central bank was the first in the G7 group of industrialized economies to raise interest rates since the global financial crisis began unfolding.

Canada's economy faring better than most
Recent data has shown the Canadian economy continuing to shake off the effects of the recent slowdown.

The most recent employment report issued showed that Canada created 93,200 jobs in June, far above economists' forecasts. The Canadian economy has now recouped almost all of the jobs lost in the recession.

The unemployment rate fell to 7.9 per cent — its lowest level in more than a year.

Bank of Canada surveys released last week suggest that Canadian businesses remain optimistic as far as sales and hiring are concerned.

"With solid employment growth powering consumers, and business investment now surging, Canada's domestic economy still looks solid," noted Bank of Montreal economist Benjamin Reitzes.

The international economic recovery has been more uncertain. Recent U.S. and European economic data, for instance, has been tentative at best.

Analysts say that weakness should be enough to keep the Bank of Canada from aggressively raising rates.

TD Bank economist Grant Bishop agrees that the central bank will hike by a quarter point Tuesday, but thinks the bank will underscore "the economic uncertainties in its communiqué, leaving an open door to a pause on rate hikes if conditions warrant."

A survey of 20 economists by Reuters finds that most expect the central bank's key lending rate will be at 1.25 per cent the end of the year, meaning that a couple of additional small rate hikes may be in the offing after Tuesday's, along with a pause or two.

Some experts see peril in call for higher interest rates

The Canadian Press

Date: Mon. Jul. 19 2010 8:09 PM ET

OTTAWA — Bank of Canada governor Mark Carney has seldom heard such unanimity about what he should do with interest rates at a time of economic uncertainty.

The consensus of 12 economists surveyed is that the governor will hike the policy rate by a quarter point for the second time in as many months Tuesday to 0.75 per cent, still an extremely low level.

It's the same verdict for the 11 private sector and academic analysts who made up the C.D. Howe Institute's monetary policy council this month -- all casting their vote for further rate increases. Four even called for a half-point jump to one per cent.

As well, the markets have priced in a quarter-point hike for weeks.

But a few bearish economists are urging Carney to ignore the dubious wisdom of crowds, warning of potential danger if he succumbs to the pressure to raise borrowing costs as the economy is starting to recover from recession.

"I don't believe the case for hiking rates is valid, and I think Canada will pay for this," says Carl Weinberg, chief economist with U.S.-based High Frequency Economics.

Higher interest rates drive the cost of borrowing higher, discouraging consumer spending and business investment that are key to economic growth. As well, Canada will open up a three-quarter point interest rate differential with the U.S., which will raise the value of the loonie and squeeze Canadian exports to the United States.

"You could push the economy back down into the hole again," Weinberg warns.

Brian Bethune of IHS Global Insight concurs, saying Carney's first mistake was to signal a leaning towards higher rates in April, then following through with the first rate hike in three years on June 1.

The result was that markets pushed up mortgage rates in the spring by a full point percentage point, helping to kill off the housing rally, which had been a key driver of Canadian growth.

Carney himself appeared to express some reticence last month, noting that the global recovery was uneven and in advanced economies, "heavily dependent" on government and central bank stimulus. He wrapped up by cautioning against counting on a second hike on July 20, as many had and still do.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," he advised.

Since, almost all indicators have gone south. Along with the European debt worries is concern that the U.S. may be heading toward a double-dip recession. China has advised its growth will be more moderate going forward.

In Canada, the economy followed an extraordinary 6.1 per cent acceleration in the first quarter with a sudden thud in April -- no growth. Retail sales, housing, manufacturing and balance of trade have all turned negative.

The argument for further interest rate hikes, as expressed by the C.D. Howe panel, was that the need for so-called emergency-level rates had ceased and that financial-market indicators point to inflation above two per cent -- the central bank's target -- in the next few years.

Royal Bank chief economist Craig Wright, who is a member of the panel, said the bears are exaggerating the impact of modest rate increases from what are unsustainably low rates.

He points out that Canada had the best two months of job creation on record in April and June, when employment grew by 109,000 and 93,000 respectively.

"The crisis has eased, and in that environment the crisis setting for both interest rates and fiscal policy can be eased as well," he argued. "The Bank of Canada is not looking at inflation today, it's trying to extrapolate where it will be in 12 to 18 months and if we don't moderate growth, we will run into inflationary concerns."

Wright does agree with the bears that this is no time to be aggressively tightening policy.

But labour economist Erin Weir of the United Steelworkers says any increase, even a small one, is without basis.

While 372,000 new jobs were created during the past year as of June, 270,000 more people joined the labour force during that period, he notes. This explains why the unemployment rate remains relatively high at 7.9 per cent, two points higher than it was before the recession.

And Bethune calls inflation a bogeyman. It is currently a tame 1.4 per cent, and with the global economy braking, unlikely to rear its head any time soon.

Bethune suggests an almost psychological fear of low rates may be behind the push to raise them. He reflects back to the summer of 2008, a few months before the economy caved in, when the consensus was near unanimous that rates were still too low. The concern looks absurd now.

"They are discomfited, they get twitchy, their feet are jumping because rates are too low," he says of monetary economists.

"Even in the Fed (U.S.'s central bank), there was an emerging consensus early in 2010 that it would have to have an exit strategy and start implementing it within months ... and now look where we are." Last week, the Fed was considering further stimulus as it downgraded American's economic outlook.

Bethune says Carney should look past the temporary strong jobs numbers and already past first quarter growth, and instead focus on the weak U.S. recovery and the drag it is bound to have on Canada going forward.

"It would be hard for them (Bank of Canada) not to raise rates when there are so many people saying raise rates, but this is when the central bankers earn their money," he said.

Mark Carney’s balancing act: Need for higher rates vs. global risk

Published On Mon Jul 19 2010

Les Whittington

Ottawa Bureau OTTAWA-Forced into a high-risk balancing act by the sputtering world economy, the Bank of Canada is expected to continue with marginal increases in its trend-setting rate Tuesday. But the central bank will temper the decision with a strong note of caution.

Analysts expect Bank Governor Mark Carney to hike the key lending rate by 0.25 per cent to 0.75 per cent.

If so, it would be only the second increase since April 2009, when Carney dropped the overnight rate to a rock-bottom 0.25 per cent—and promised to keep it there for a year—to combat the recession.

He abandoned that strategy on June 1 when the rate was set at 0.50 per cent.

Higher Bank of Canada rates will result in increased borrowing costs for business, consumers and some homebuyers.

A gradual run-up in Canadian interest rates is warranted by the renewed strength of the Canadian economy in early 2010 and the need to head off any chance of runaway inflation as economic conditions brighten, economists say.

Having weathered the recession better than most industrialized countries, Canada has returned to a position of growth. While business conditions have weakened in the past few months, the economy experienced red-hot 6.1-per cent growth in the January-through-March period.

And the job situation is slowly improving. Most of the 300,000-plus jobs lost in the recession have been recouped even though a growing workforce has left unemployment at a still-high 7.9 per cent.

“Domestic conditions continue to argue powerfully for further rate increases,” TD Bank Financial Group said in an analysis of Carney’s options.

Under current conditions, the central bank is expected to gradually rachet up its key lending rate over the next six months to the 1.25-per cent range at the end 2010.

But Carney is likely to balance Tuesday’s decision with serious warnings about the uncertainties ahead, particularly the risky direction of the international economy and its potential impact on Canada.

The central bank has to walk a fine line, says TD Bank economist Eric Lascelles.

“It’s one of those very tricky situations where traditional economic analysis—and just looking at the forecasts—suggests ‘Yeah, sure, they should hike,’” he said. “Then suddenly you take into account all of these risks that are disproportionately skewed downwards and it’s a much tougher call.

“The strategy that the Bank of Canada probably employs is it sticks to the assumption that all is reasonably well as the forecasts suggest and continues to raise rates but stays on guard for surprises and keeps the market on guard for surprises.”

The major risks to the world economy are the shaky financial situation of European countries in the wake of the Greek debt crisis and the weak recovery in the U.S., which takes 75 per cent of Canada’s exports.

This picture is clouded by a less robust housing market in Canada, an impending decline in Ottawa’s stimulus spending and reluctance so far by Canadian companies to pick up the slack by increasing business investment.

“You can’t automatically assume that all will be well” with Canada’s economy, said Lascelles. “I think that growth is still the likely outcome but how strong will that growth be?”

United Steelworkers economist Erin Weir disagrees with the view that Carney should gradually tighten monetary policy.

He said inflation is still below the central bank’s 2-per cent target and, even if hiring is increasing, wages have been so flat that there is no threat of a wave of wage-driven price increases.

With the U.S. Federal Reserve Board keeping rates low to bolster the American business climate, higher rates in Canada could worsen the outlook. That’s because rising interest rates tend to increase demand for a currency as investors anticipate better returns, thus driving up the loonie on exchange markets. This in turn makes it harder for Canadian manufacturers to compete for sales south of the border.

“I don’t see any need to raise rates,” said Weir. “And I think the downside to raising them is that, especially in a context where the American Federal Reserve is holding steady, it will tend to push up the Canadian dollar, which is certainly a huge challenge for a lot of Canadian export industries that are struggling to try to recover.”

Canadian real estate: A soft landing or something worse?

CTV News - July 16, 2010
Michael Babad

These are stories Report on Business is following today. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Housing market pace slows
Canada's housing market is cooling off after its record-setting pace in the post-recession period. The Canadian Real Estate Association said today existing home sales fell 8.2 per cent in June from a month earlier, largely because of a slower pace in Toronto and Calgary. The national average resale price dipped 1.2 per cent, to $342,662, from May's record $346,881. That's still almost 5 per cent above last year's prices. Here are the views of four economists:

Adrienne Warren, Bank of Nova Scotia: "We expect to see a further slowing in sales over the second half of the year as interest rates gradually drift up. (It should be noted, however, that sales are still at a historically high level despite this year’s pullback, supported by improving employment conditions and still-low borrowing costs.) While this in turn will likely put some further modest downward pressure on prices, listings are also beginning to trend lower, which will help to maintain a fairly healthy balance between buyers and sellers."

David Rosenberg, Gluskin Sheff + Associates: "The Canadian housing market at one point during last year's parabolic surge in sales and pricing got as much as 20 per cent overvalued. In recent months, demand has weakened under the weight of eroding homeowner affordability. At the same time, the rush of new construction has elevated the supply side of the equation. and so what falls out these shifting demand and supply curves is a reduction in prices - the long awaited correction is here. Remember - excesses in one direction are generally followed by excesses in the other direction. And bubbles never correct by going sideways. In a nutshell, there's more air to come out of this Canadian housing balloon."

Douglas Porter, BMO Nesbitt Burns: "By some appearances, Canadian home sales have done their best impression of a capsized canoe in the wake of the new tighter mortgage insurance rules and the modest back-up in borrowing costs in the spring. Sales were also front-end loaded in 2010 ahead of the [harmonized sales tax] and are now in rapid reverse. While the headlines may look soggy for the next few months, there are reasons to believe the market could soon regain its balance - long-term mortgage rates have dropped, employment remains on a roll, and prices have stabilized."

Pascal Gauthier, Toronto-Dominion Bank: "After improving markedly in 2008, home affordability eroded significantly in 2009. With the typical lag, this is naturally slowing the pace of sales. Nonetheless, the housing market slowdown should be cushioned by an improving employment and income picture. The level of interest rates remains quite supportive of sales activity, and rising interest rates would only occur against a stronger overall economic backdrop."