Lending Practices Blamed for Home Sales Decline

The chief economist for the National Association of Realtors (NAR) believes restrictive lending practices are contributing to disappointing home sale numbers.

In May, according to a NAR press release, existing home sales fell 3.8 percent to a seasonally adjusted 4.81 million. That total is down from 5 million in April and 15.3 percent below the May 2010 total of 5.68 million when sales temporarily surged in response to the home buyer tax credit.

“Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards,” NAR chief economist Lawrence Yun said in a released statement. “There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction – this overreaction is clearly holding back the recovery.”

Local real estate agent and Dacula Patch contributor Matt Hermes said he would not necessarily describe the lending industry’s response as overreacting.

“More and more I am seeing that the lending practices are much more stringent than we saw just three or four years ago and in a sense this is a very good practice,” Hermes said in an emailed response to questions. “Years ago, anyone that was able to sign their name and chew gum at the same time was able to qualify for some very exotic and disastrous loan products.”

Now, Hermes said, obtaining a loan is far more challenging.  

“Even potential borrowers with a significant down payment and credit scores over 700 are finding it difficult to get and be approved for a loan,” he said. “Just this past week I lost a home sale over what is in essence a minor detail that ultimately caused the loan to be denied.”

Dacula Patch real estate columnist and local agent Scott Lacy said he has also seen the effect lending practices are having on potential real estate transactions.

"Lending practices have made it more challenging in the sense that the constant need for more information makes the loan process more tedious for the borrower. In some cases the smallest detail can cause the loan to be declined," Lacy said.

The president of the NAR, Ron Phipps, also expressed concern that certain proposals currently under consideration could have a further negative impact on the housing market.

“We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum down payment requirements to 20 percent,” he said. “We don’t need to throw the baby out with the bath water – increasing down payment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”

Hermes agrees.

“For Washington to even consider a minimum down payment of 20 percent would in my opinion be a death sentence to the real estate market as we know it,” Hermes said. “To require a down payment of this amount would effectively stifle the market and would put a halt to purchases.” 

Hermes said most of today’s families do not have the ability to save up enough money for a 20 percent down payment. 

“A 10 percent down payment is reasonable but my thought process is that if a buyer has 5 percent down and has the proven ability to pay off debts, this should not disqualify this potential purchaser from being able to qualify for a loan,” he added. 

Lacy said buyers in the top end of the market will not suffer as much as those in the lower price brackets, but still has great concern over what impact such a large down payment will have on the market as a whole.

"At the top end of the market, many buyers are already putting 20 percent percent down, however in $100,000 to $300,000 range, most buyers are only putting 3.5-5 percent down," Lacy said. "If the government mandates 20 percent, sales in this price range will come to a screeching halt. In turn, the person that just sold their house in the lower price range, will not be buying the next house in the upper price range. Twenty percent will be a devastating blow to the real estate industry."

Other factors weighing on the recovery of the housing market, according to the NAR, are spiking gasoline prices, widespread severe weather and a slow pace of overall economic activity. However, the news was not all negative.

“The price decline could be diminishing, as buyers recognize great bargain prices and the highest affordability conditions in 40 years; this will help mitigate further price drops,” Yun said.

In May, the national median existing home price for all housing types was $166,500, a drop of 4.6 percent from May of 2010. In the South, the median price of existing homes was $149,200, a decline of 3.1 percent from last year.