By Dr Denver H. Bubble
Rising home prices are causing new home buyers to go deeper and deeper into debt. According to a recent article by the Wall Street Journal, (behind a paywall) Rising Home Prices Push Borrowers Deeper Into Debt, "roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc." This was almost triple the amount for 2016 and the first half of 2017. “Debt-to-income ratios measure the share of a household’s pretax income that goes to paying a potential mortgage, plus credit card payments, student loans and other debt.” Borrowers who have too much debt to income often struggle with making mortgage payments when emergencies pop up such as losing a job or unexpected medical expenses.
Home prices that have been moving higher then incomes and historical low level of housing supply are believed by economists to be the driving force of this trend to more debt to income. This is translating into first-time buyers growing reluctance to purchase a home confirmed by a NAR March Survey. Adding insult to injury, mortgage rates have increased on 30 year loans from 3.95% at the beginning of the year to 4.40% as of last week further dampening affordability.
Our friends who almost failed during the Global Financial Crisis, Fannie Mae and Freddie Mac, have responded by backing new types of loans such as “loans made by lenders who agree to help pay down a buyer’s student debt or making it easier for self-employed borrowers to get mortgages. Several years ago, Fannie and Freddie started guaranteeing loans with down payments as low as 3%. Last summer, Fannie Mae moved to back more loans made to borrowers with debt-to-income ratios of up to 50%, up from a typical limit of 45%.” This will end well. Just like last time
Lenders have at least been cautious in making new loan preferring to make loans to only borrowers with credit scores above 700. According to Inside Mortgage Finance, about “about 78% of the loans with debt-to-income ratios above 45% were made to borrowers with credit scores of 700 or more.” One ominous trend is “the Urban Institute found that the share of borrowers with Fannie Mae-backed mortgages who had high debt-to-income ratios and had credit scores below 700 jumped to nearly 25% in the first two months of this year from 19% a year earlier.”
Low supply of housing inventory, high home prices and now growing debt to income levels does not bode well for our housing market here in the metro Denver area