When Federal Reserve head Janet Yellen was asked about housing issues last week, she gave a classic economist’s “on-the-one-hand, on-the-other-hand” answer. But because she neatly summed up the disparate economic realities confronting millions of owners, sellers, renters and would-be buyers around the country, it’s worth taking a closer look.
On the one hand, she said, rising home prices have been terrific news for many owners. “The increase in house prices is restoring the wealth of many households who have [home equity] as their major asset,” she said. Though Yellen didn’t cite specific statistics, the numbers have been impressive — even explosive in some major markets. According to the latest Case-Shiller 20-city composite index, home prices were up 5 percent year over year. In San Francisco, prices are 10.3 percent higher than a year ago, in Seattle 7.5 percent higher and in Los Angeles they’re up by 5.5 percent.
Overall, according to the Fed’s latest calculations, Americans’ home equity — the difference between the market value of their homes and the mortgage debt they owe — hit $11.7 trillion in the first quarter of this year, up a stunning $1.1 trillion from the same period in 2014 and $5.3 trillion from 2011.
These are brain-numbing, almost incomprehensible numbers, but as Yellen pointed out, they are crucially important to the overall economy. Homeowners who have growing equity tend to spend more and help expand the economy.
On the other hand, there are millions of renters who are being squeezed by the housing gains of owners and landlords. Many of them are prospective first-time buyers frustrated by higher asking prices; others are so-called “rebounders” who encountered difficulties during the financial crisis but have now rebuilt their credit and want to buy.
But both groups face not only rising rent demands from landlords — in some large metropolitan areas they have jumped by double digits during the past year — but what Yellen described as “credit availability” conditions that are “quite constrained.” Interest rates remain low — around 4 percent on average last week for 30-year fixed-rate loans — but underwriting requirements remain stringent.
“Anyone who doesn’t have a pristine credit rating finds it very difficult at this point to qualify for a mortgage,” said Yellen. As a result, she added, “we’re seeing quite a bit of reluctance, given the job market and … the history of … house prices,” on the part of renters who’d like to buy but feel frozen out.
There’s no question about tough mortgage approval standards. In fact, average FICO credit scores on new mortgages for home purchases by giant investors Fannie Mae and Freddie Mac actually increased during May to 757 — the highest level in more than a year and up by 5 points since January, according to new data compiled by mortgage technology company Ellie Mae. The average down payment last month at both government-administered companies: 19 percent. Those are formidable hurdles for just about anybody, especially for younger workers hoping to get into a home of their own.
But there may be a trend taking shape that could brighten prospects for consumers that the Federal Reserve and Yellen haven’t kept tabs on yet: In recent weeks, rising numbers of first-time buyers have been finding ways to get past the hurdles.
According to a June 19 Campbell/Inside Mortgage Finance tracking survey, which polls 2,000 real estate agents nationwide, first-time buyers accounted for nearly 39 percent of home purchases in May — the highest level since August 2010. The National Association of Realtors reported June 22 that first-time purchases in May rose to 32 percent of all buying activity — the highest it’s been since September 2012.
What might be going on? Tom Popik, research director for Campbell Surveys, told me that one key change he sees in the data has been in financing. The Federal Housing Administration cut its annual mortgage insurance premium rate drastically in late January. That has made 3.5 percent down payment loans affordable to first-time buyers with FICO scores and debt-to-income ratios that would trigger rejections elsewhere in the market.
The FHA’s move is not the only change underway — wage growth and employment are picking up, giving consumers greater confidence in major purchases, among other possible factors. First-timers need to check out FHA again. For many of them, it could be the way to finally own, rather than keep paying rent.
And there’s no on-the-one-hand, on-the-other-hand economist talk here. The change is for real.
