September 28th, 2012
Several reports released as of late suggest that the housing market is on the mend. Home prices are strengthening, mortgage rates are hovering at record lows and builder confidence continues to increase. However, many analysts have come forward to say that despite modest gains in several housing categories, homebuyers in today's economy still face challenges that may keep homebuying depressed.
The most recent industry report from the website Trulia revealed that homeownership has never been more affordable to Americans than it is now, with owning a home being 45 percent less expensive than renting on average across the country. Further, mortgage rates for 15-year fixed-rate loans continue to linger under 3 percent. So why are more buyers avoiding the housing market?
One of the most commonly cited problems buyers are facing revolves around tight credit conditions. Banks that were significantly affected by the housing market crash responded by tightening the credit and income standards needed to secure a loan. Further, heavier regulation of the financial industries has cut into the profits of many large lenders and made them less likely to take on more risk by lending to consumers. Many Americans who lost their jobs or were overburdened by rising living costs were forced to turn to credit to meet their needs, which had an adverse effect on their credit scores. This combination has resulted in a shrinking pool of eligible buyers.
Government response to the credit crisis
Federal Reserve Chairman Ben Bernanke recently announced another stimulus program to help re-energize the housing market and spark homebuying. The new quantitative easing plan – commonly referred to as QE3 – will allow the Fed to start purchasing $40 billion in mortgage-backed securities each month on an open-ended basis. The Fed hopes that in doing so, it will be able to drive mortgage rates even lower and entice more buyers to the market.
Many analysts have voiced their skepticism of this plan, pointing out that mortgage rates have been hovering near or setting record lows for months, and this has not been enough to bring more buyers to the housing market. Further, simply because the Fed helps keep mortgage rates low does not necessarily mean that the majority of Americans will qualify for low rates. Shaky credit or limited income may leave many applicants with higher rates than anticipated.
In addition, the stunted labor market and high foreclosure rates have largely played into Americans' fickle confidence in the economy, which may be prompting many to stand on the sidelines and avoid large financial investments, such as home purchases. Instead, analysts say, the issue comes back to bank lending.
"We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending," Catherine Mann, former Federal Reserve economist, told CNN Money following the announcement of QE3. "Since it hasn't done any of that, it probably hasn't created jobs either."
Helping Americans secure mortgages
While the long-term effects of government intervention have yet to be fully realized, mortgage applicants are charged with getting their credit in order and ensuring they have the income and documentation necessary to put lenders at ease. Most industry professionals agree that buyers can increase their chances of getting approved for a home loan by working closely with a mortgage consultant to find properties in their price range. It's also crucial that buyers eliminate unnecessary debt to give their credit scores a boost. Finally, lenders are scrutinizing applicants' taxes, employment records and financial statements more closely than ever. Buyers should ensure they provide lenders with a complete application package to avoid getting turned away for missing paperwork or minor mistakes.