The slow pace of the economic recovery is worrisome for the U.S. housing market. Michelle Meyer, U.S. economist for Bank of America Merrill Lynch, said she is concerned about the second half of the year, because of their forecast that U.S. GDP growth will slow to 1 percent in the first quarter.
In an interview with Bloomberg Radio however, Meyer said despite the low interest rates and record affordability, housing demand has not recovered to the extent it should have because lending to lower quality borrowers remains tight:
“What I’ve been looking at this week is the reported credit standards versus what is actually being originated. And If you look at the FHA the Federal Housing Authority, and Fannie and Freddie, the FHA is willing to lend to scores as 620 with only 3.5 percent down which seems like it should be able to cover a large part of the universe and help to support housing demand.
But in reality if you look at the credit scores of the loans they’re actually making, it’s much higher, an average of about 720. So there is not much lending going on to the lower quality borrowers because of probably a lot of the uncertainty around not only the macro outlook and the housing outlook but also what the mortgage finance system will look like. So I would expect to see credit remain tight certainly in the near term.
But has the Fed’s plan to keep interest rates low helped the housing market?
“The Federal Reserve has done a really good job at bringing down interest rates. So what the Federal Reserve can control is the price of borrowing but it can’t really control the availability and they’ve made the price very attractive, we’re at record low mortgage rates.
What we need to see is credit open up again and that will take time. It will take time because you need to see the perception that prices have indeed bottomed and are actually going to increase. So it becomes a good prospect to lend again. I also think clarity on the regulatory front and what the government involvement in the mortgage market will be going forward will likely help increase credit as well. So these things will happen over time but certainly there is not an easy fix.”