Tight credit makes it harder to sell houses.

The June 25 2011 edition of the Wall Street Journal had a front page article titled “Tighter Lending Crimps Housing”.  The article talked about the number of credit application that are currently being turned down, stating that over 25% of 2010 mortgage applications were rejected!  The article related a story of a woman who had an 800+ credit score, no debt, and more that 50% cash to put down,but was rejected for a loan.  That’s crazy!

What is happening is that lenders jumped from the “loose money” ditch to the “tight money” ditch.  They took such huge losses from their freewheeling practices of a couple of years ago that they have over-compensated, and are now turning down borrowers that they would have accepted in a normal market.

Home sales depend on the buyers getting a mortgage.

There is an old saying in the real estate business: “If you can’t finance it, you can’t sell it”.  The saying demonstrates the important of a healthy mortgage market as it relates to the housing market.  When credit is tight and prospective buyers can’t get a mortgage, housing inventories rise and prices drop.  A byproduct of this trend is that rents rise, as these prospective buyers become discouraged and become (or remain as) tenants.

Cash house buyers fill the gap.

Tight credit and low prices also attract cash buyers.  In Miami this April, a whopping 63% of all home sales were cash deals!  A lot of that money has come out of the stock market as investors tire of Wall Street’s volatility and search for a more stable investments.  And I can’t help but wonder how much of that money is coming from overseas, given the weak dollar.

On the upside, I talked to a mortgage lender late last week that is working with a new national lender.  He said that they can do conventional 30-year fixed financing with credit scores as low as 600!  Lenders like this are what the housing market needs right now.  Hopefully we will see an easing of credit restrictions in the near future.  That, along with an improving job market, will go a long way to pulling the housing market out of the doldrums.

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