Lenders Fear Another Real Estate Bubble is Inflating


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NEW YORK (MainStreet) — We haven't fully recovered from the last agonizing housing crash, yet mortgage bankers already fear a recurrence. More than half (56%) of North American lenders surveyed for FICO expressed concern that "an unsustainable real estate bubble is inflating."

"The home loan environment has bifurcated," says Dr. Andrew Jennings, chief analytics officer at FICO. "Six million homeowners in the U.S. are still underwater on their mortgages, with the average negative equity a whopping 33%. Yet with home prices soaring in many cities, total homeowner equity in the U.S. is at its highest level since late 2007. That doesn't feel like a healthy, sustainable growth situation. No wonder many lenders in both Canada and the U.S. are concerned about the risk in residential mortgages."

Consumers are finding it increasingly difficult to qualify for a mortgage as lenders tighten their underwriting standards. Of the mortgage bankers surveyed, most (59%) said a "high debt-to-income ratio" is their top concern when approving loans. Additional stumbling blocks for borrowers include multiple recent applications for credit (13%) and a low credit score (10%).

"As consumer confidence picks up and people increase their borrowing, lenders are understandably concerned about growing indebtedness," said Mike Gordon, executive vice president of sales, services and marketing at FICO. "For the last two quarters, around 65% of our respondents said they think credit card balances are headed higher. Those are the two highest figures we've ever seen in this survey. When I talk with bankers, they tell me they're happy to see growing consumer optimism, but they're wary of a return to reckless borrowing."

While pending home sales rose in May, National Association of Realtors chief economist Lawrence Yun says sales through the end of the year are likely to lag 2013 totals as affordability and credit accessibility remain stiff challenges for first-time home buyers.

"Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation," Yun says. "However, second-half sales growth won't be enough to compensate for the sluggish first quarter and will likely fall below last year's total."

First-time home buyers accounted for just one-quarter (27%) of existing-home sales in May, the most recent month's data available.

"The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10% behind last year's pace," says Yun. "Meanwhile, apartment rents are expected to rise 8% cumulatively over the next two years because of tight availability. Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable."

--Written by Hal M. Bundrick for MainStreet

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