Lending Standards Toughest Since Early 1990s | John Burns Real Estate Consulting

Lending Standards Toughest Since Early 1990s


Spooked by declining home prices and rising delinquencies/foreclosures, lenders are now becoming more restrictive when issuing residential loans, approaching levels not seen since the post-S&L crisis of the early 1990s. The Federal Reserve’s most recent Survey of Senior Loan Officers indicates that roughly 16% of respondents tightened credit standards in 2007-Q1. Strict tightening took place during the housing market downturn in the early 1990s, as well as the lax guidelines that prevailed from 2004 through 2006.

Economic Growth…………………………………………………C
Expansion within the U.S. economy is slowing, as evidenced by the recent GDP growth revision to 0.6% from 1.3%, the lowest quarterly increase since the fourth quarter of 2002. However, May ushered in stronger-than-expected job data, providing a glimmer of optimism. Year-over-year retail sales and personal income both declined during the month of April, along with core CPI.

Leading Indicators……………………………………………….C-
While the U.S. stock market continues to rally, marginal corporate profit growth, a flat yield curve and high oil prices all point towards moderate economic expansion. All of the major stock market indices continued to climb in May, with the Dow, S&P 500 and Wilshire 5000 reaching new all-time highs. Although investors have shunned homebuilder stocks during the recent stock market rally, the S&P Super Homebuilding Index improved for the second consecutive month, and is currently down only 7% year-over-year. Corporate profits for the first quarter of 2007 rose 6.3% year-over-year. The yield curve is currently flat, as both 10-year and 2-year Treasuries stand at 4.84%. Oil prices continue to remain high and are unlikely to decline in the coming months, as the peak summer driving season is now upon us.

Mortgage Rates…………………………………………………C+
Mortgage rates increased during the month of May, but continue to remain near historical lows. The 30-year fixed mortgage rate increased to 6.42% in May, while one-year adjustable rates increased to 5.57%. Adjustable-rate loans continue to decrease as a percentage of total loans, falling to 18% of total loan activity in the last week of May, which is less than half of the 35% figure witnessed during the peak of the housing market in 2005.

Consumer Behavior……………………………………………C+
High gas prices and a tough housing market are having a minimal impact on consumers’ perceptions of the overall economy, as both Consumer Confidence and Consumer Sentiment increased in May. That said, the current stock market rally and buoyant job market are likely outweighing consumers’ pessimistic concerns about the economy.

Existing Home Market…………………………………………..C
The existing home market continues to suffer, as April sales declined to 5.99 million annualized units, equating to a sequential drop of 3% and year-over-year drop of roughly 11%. The NAR continues to revise downward its outlook for 2007 existing sales and prices. Specifically, year-over-year existing sales are now forecast to decline 5% in 2007, with prices falling 1.3% over the same period. We believe the NAR sales data is overstated, and their 2007 estimates are wildly optimistic. Inventory levels, a vital indicator in today’s oversupplied market, rose to 8.4 months in April, representing a 38% year-over-year increase. Alarmingly, inventory levels now stand at their highest level since August 1992.

New Home Market……………………………………………….D+
In April, new home sales increased 16% sequentially to an annual rate of 981,000, representing the biggest one-month rise in sales since April 1993. We don’t believe these sales volumes are accurate, given what has happened to our clients’ businesses. The one factor propping up sales is that the number of communities is up substantially over the last few years. There is no doubt that sales per community have dropped significantly. The rosy Census data conflicts with the downward NAHB index trend, as well as the order trends reported by the public builders.

Housing Supply…………………………………………….D+
Housing starts increased in April, though permits (a leading indicator) witnessed their most precipitous sequential decline since February 1990. Starts increased to a seasonally adjusted annual rate of 1.528 million in April, representing a sequential increase of roughly 2.5%, and a 16% year-over-year decline. Building permits declined roughly 9% sequentially in April, and are now down 28% year-over-year to a seasonally adjusted annual rate of 1.06 million.

U.S. HOUSING MARKET STATISTICS
Data Current Through May 31, 2007
Grade*
Overall Grade
C
Statistic
Grade*
C
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)
0.6%
C-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA
1,904,000
C
Employment Growth Rate
– Non-ag Payroll, NSA
1.4%
C
Unemployment Rate
4.5%
B-
Productivity
1.7%
C
Retail Sales
3.2%
D+
Inflation (core CPI)
2.3%
B
Personal Income Growth, nominal
5.9%
C-
Federal Deficit (last 12 mos., $mil curr.)
-$149,473
C+
Statistic
Grade*
C-
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Indicators Annual Growth Rate over Last Six Months
Leading Econ. Index
-0.4%
C
ECRI Leading Index
5.7%
C
Manpower Net Employment Outlook
18%
C
Corporate Profits (pre-tax)
6.3%
C
Interest Rate Spread
10-year Treasury
4.84%
2-year Treasury
4.84%
Interest Rate Spread
0.00%
C-
Stock Market (Return over last 12 months)
Dow Jones
22%
C
S&P 500
21%
B-
NASDAQ
20%
C
Wilshire 5000
21%
B-
S&P Super Homebuilding
-7%
D
Crude Oil Price (Current $)
$63.46
D
Inst. of Supply Managers Index
55.0
C
Statistic
Grade*
B
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Mortgage Rates, fixed
6.42%
A-
Mortgage Rates, adjustable
5.57%
B-
Fixed/Adjustable Spread
0.85%
D-
Fixed/10-year Spread
1.58%
C
Fed Funds Rate
5.25%
Percentage of Adjust. Loans
17.7%
C
Subprime Index(ABX.HE.BBB-.06-02)
73.4
D-
Fed Reserve Loan Officer Survey
16.4%
D
Statistic
Grade*
C+
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index
108.0
C+
Consumer Sentiment Index
88.3
C
Consumer Comfort Index
-8
C
Equity/Owned Home (2003$)
$144,466
A+
Median Household Income
$46,326
– Growth Rate, nominal
4.5%
C
Revolving Cons. Credit per Household
$7,622
– Growth Rate
6.4%
B-
Statistic
Grade*
C
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
NAR Single-Family Median Home Price
$220,500
A+
NAR Single-Family Annual Price Appreciation
-0.9%
D-
Freddie Mac Annual Price Appreciation
4.4%
D+
Annual Sales Volume, SA
5,990,000
B+
Months Supply of Unsold Homes, SA
8.4
C-
Purchase Mort. App. Index, SA
427.0
B+
Pending Home Sales Index, SA
101.4
D
Homeownership Rate
68.4%
A-
Homeowner Vacancy Rate
2.8%
F
Statistic
Grade*
D+
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index
30
F
Multifamily Condo Market Index
23.1
F
Median Price, NSA
$229,100
A
Annual Appreciation Rate
-10.9%
F
Sales Volume, SA
981,000
B
Months Supply of Unsold Homes, SA
6.5
C
Months of Homes Completed, SA
2.1
C-
Months of Homes Under Const., SA
3.4
C
Months of Homes Not Started, SA
1.0
C
Statistic
Grade*
D+
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
Housing Starts, SA
1,528,000
C
Single-family Permits, SA
1,063,000
C
Multifamily Permits, SA
366,000
D+
Total Permits, SA
1,429,000
C
Manuf. Housing Placements, SA
97,000
F
Total Supply, SA
1,526,000
D+

 


If you have any questions, please contact us at (949) 870-1200 or fill out this form.