A FAVORED HOBBY for city dwellers vacationing in quaint towns and villages, it’s browsing the windows of local real estate companies and dreaming of swapping their cramped two-bedroom apartment for an entire house and garden. Your correspondent is not immune to the call: she gazed wistfully at a pretty house near the Deschutes River in Bend, Oregon, located among the lakes and peaks of the Cascade Mountains (pictured). She dutifully checked the listing price on Zillow, a real estate platform, to face the grim reality: the three-bedroom home was worth $ 1.25 million, a 44% increase from the the previous year, which resulted in a higher price per square foot than Queens and most Washington, DC.
It’s hard not to be uncomfortable with the spectacle of the American real estate market. House prices rose 13% on the year, the biggest jump since before the 2007-09 financial crisis. Inventories of homes for sale have fallen: there are so few in America that there are currently more agents than listings. A typical house sells in 17 days, a record, for 1.7% more than its asking price, a record. When Redfin, another real estate platform, took its annual survey of around 2,000 homebuyers, 63% said they had made an offer for a home they had not seen in person. The latest boom in house prices was followed by a deep and painful recession. Is history likely to repeat itself?
Consider the mixed news first. The average loan-to-value ratio of a new mortgage in America is 83%, which seems reasonable. On the reassuring side, this figure has not increased even as prices have skyrocketed. The worrying aspect is that the borrowers are forked. While a buyer can invest up to 20% of the value of a property, they do not need to purchase private mortgage insurance. So about 40% of borrowers make a down payment of 20% or more. Most of the rest, more than half, rejected less than 10%. Considering how quickly prices have skyrocketed in some markets, a drop in house prices could leave some of them underwater.
And yet, compared to the past, borrowers are in much better financial health. Only a quarter of mortgages taken out between 2004 and 2007 were for people with a “very good” credit rating (over 760). One-eighth of borrowers were “subprime”, with scores below 620. Standards are now higher. In 2019, 60% of mortgages went to those with scores above 760. This share increased further during the covid-19 pandemic as banks, fearing losses, tightened lending standards: 73% of mortgages made in the first quarter of 2021 went to borrowers with very good credit scores. Only 1.4% went to subprime borrowers.
There is also anecdotal evidence of caution on the part of mortgage bankers. They are calling on workplaces to ensure that employees moving from large cities with high cost of living will be allowed to work remotely indefinitely. One bank reports that its most active lending activities have been those aimed at the haves: second home mortgages and “jumbo” mortgages (those over $ 550,000). If the roaring real estate market of the mid-2000s was the product of reckless lending to unreliable borrowers, the boom is now made up of different things: big loans to wealthy borrowers with long credit histories in search of pasture greener. ■
This article appeared in the Finance & Economics section of the print edition under the title “A More Beautiful Image”