Real Estate News

Officials think talk of ‘tight credit’ holds back some home sales

A house in the College Hill neighbhood is for sale. In the Wichita area, 2014 home sales have been nearly flat to last year through the first 11 months of the year.
A house in the College Hill neighbhood is for sale. In the Wichita area, 2014 home sales have been nearly flat to last year through the first 11 months of the year. The Wichita Eagle

While home sales in the Wichita area continue to be moving up, the growth isn’t as robust as in the past couple of years.

Through November, data from the South Central Kansas Multiple Listing Service showed 8,422 new and existing homes were sold. That’s just 1.1 percent above sales in the same 11-month period in 2013, and much lower than the 10 percent gains seen between 2012 and 2013, and 2011 and 2012.

“I don’t see it as a negative, per se,” said Greg Fox, owner and broker of Realty World Alliance. “It’s always better to have some (growth) than none.”

Fox, who also is volunteer president of the MLS, thinks persistently low inventory of existing houses may be part of the cause. According to area MLS data, the number of existing houses for sale in November was 2,702. That compares with 2,909 for sale in November 2013, 3,369 in November 2012 and 3,607 in November 2011.

Fox and other real estate officials think the subdued sales may be a result of credit conditions — or at the least the public perception of the availability of credit for purchasing a home — the subject of a research paper co-authored by a Kansas City Federal Reserve Bank economist.

That research, published this summer and parts of which were republished in the Fed’s 10 magazine this fall, argues that tight credit conditions are constraining a recovery in home sales, which in the past typically rebounded strongly after a recession.

The research, by senior economists Jordan Rappaport of the Kansas City Fed and Paul Willen of the Boston Federal Reserve Bank, said tight credit conditions exist because of new regulation, and banks and other lenders reacting to that regulation, as well as to an expectation of more regulation to come.

In an interview with The Eagle last week, Rappaport said the thesis of his and Willen’s assertions remain the same now as when they were preparing their research.

The one exception would be that the Fed’s November survey of commercial banks’ senior loan officers “does show they have reported some modest loosening” of mortgage credit standards, Rappaport said in the interview.

Tight credit conditions don’t mean today’s home buyer has to have “pristine credit” or a larger down payment to buy a house, Rappaport said.

His and Willen’s research showed that buyers with “imperfect credit histories” have had success getting mortgages guaranteed by the Federal Housing Administration, which is charged with helping low- and moderate-income buyers purchase their first homes.

The difficulty in getting mortgages approved is greatest in the conforming market, in which a bank originates the mortgage and then sells it on the secondary market to purchasers such as Fannie Mae and Freddie Mac.

“The challenges are much more in terms of very, very onerous documentation requirements that are very much driven by regulators and the secondary market,” said Stan Longhofer, director of Wichita State University’s Center for Real Estate and a former officer for the Cleveland Federal Reserve Bank.

Banks and other lenders that make mortgages and sell them to the secondary market are hyper-vigilant in their underwriting of those mortgages because they don’t want to risk Freddie or Fannie declining to buy the mortgage. In that case the mortgage is turned back to the bank, which then must put it on its books.

“There’s just too much interest-rate risk” for most banks to carry a 30-year mortgage on their books, he said. That is, if a bank sells a mortgage at a 4.5 percent interest rate and in 10 years interest rates move up to 8 or 9 percent, “all of a sudden they’ve got an asset that’s losing value … and they’d be upside down on it,” Longhofer said.

It’s those documentation requirements that are translating to what many perceive as tight credit conditions, Longhofer and Rappaport said.

Longhofer and Realty World’s Fox think that term — tight credit conditions — is turning off potential home buyers, especially first-time home buyers and younger buyers with student loan debt.

“I think it’s more the perception, ‘Oh, I won’t get approved,’ that’s holding them back,” Longhofer said.

It’s true that the documentation requirements to get a mortgage nowadays makes it feel like “paperwork … flowing like a flood,” Fox said. “The guidelines feel a lot tighter than they used to.”

“It’s tougher to get something underwritten,” he said. “I don’t think there’s a Realtor out there who wouldn’t tell you right now (buyers and sellers) struggle with underwriting.”

So what’s the solution to easing that perception?

“I think having the first-time home buyer educated (that) mortgages are going to be a little harder to get than 10 years ago,” Fox said.

Longhofer agreed.

“That’s, I think, the real lesson,” he said. “It will require more hand-holding. It’s just going to be a more time-consuming, intensive process, but it will all get done.”

And even if the industry could break through the misconception of mortgage qualification, would it be enough to boost home sales?

“A cautioned, ‘Yes,’” said Fox.

“A significant influx of jobs” wouldn’t hurt, either, he said.

Reach Jerry Siebenmark at 316-268-6576 or Follow him on Twitter: @jsiebenmark.