The Market Pulse Survey: 9 Years in Retrospect (Part III)

Note: this is the third and final part of a three-part article on consumers’ views towards home buying and home ownership over a nine-year period.

Access to credit, down payments, and job security all grew as concerns for consumers between 2003 and 2011. NAR’s Market Pulse survey was uniquely positioned to measure changes in consumers’ views towards home buying and home ownership during a period of dramatic change. Many of these same concerns persist today.

As low a mortgage rates and home prices fell, many would-be homebuyers sat on the fence. One section of the Market Pulse survey was devoted to this topic of factors inhibiting home purchases. Respondents were provided a list of potential obstacles to a purchase and then asked to rank them by degree of severity; small, medium, large or “huge” problem. Topics ranged from financial to personal preferences.

Foreclosures were relatively unheard of prior to 2005, but surged to the forefront soon after. As a result, banks pulled back on lending standards. The average FICO score at the GSEs rose from 711 in 2011 to over 765 by 2011. Lenders also raised downpayment requirements, which surged to more than 20% outside of the FHA along with new restrictions on the amount of help sellers could provide for closing costs. Nearly half of all respondents expressed concern about having enough funds for closing costs in every survey conducted from 2007 to 2011. Likewise, the share of respondents that indicated downpayment as a small or not-a-problem declined over this period.

Having a large enough downpayment was only part of the battle for consumers. By the tail end of the subprime meltdown, the decline in construction and financial activity as well as problems in the banking sector spread housing’s issues to the general economy. Layoffs surged as a result, while incomes flat lined and some workers even took pay cuts to hold onto jobs. Respondents’ view of job security changed dramatically following the housing bust as the share of respondents who saw it as a small or medium problem fell sharply, while those who saw it as a huge problem jumped to 83% by 2009. This pattern crested in 2010 and began to subside in 2011 as layoffs fell to normal levels and the unemployment rate eased nationally.

The tough economic times tarnished many households’ credit histories, while depleting funds for downpayments and closing. Combined with a weak employment environment and an increase in lending standards by banks, consumers’ view of their ability to get approved for a mortgage fell sharply after 2006 reaching a peak at 73% in 2010. While credit standards remained tight in 2010, job security improved in 2011 and the unemployment rate fell. Consequently, the share of consumers who felt that they would have a huge or medium problem getting approved for a mortgage eased slightly in 2011 to 71%, but remains well above the 2003 level of 56%.

The decline in prices and mortgages rates helped to elevate affordability, but it did not guarantee that consumers would find the right home for their needs. The decline in market activity caused builders to pull back and weak prices kept traditional sellers on the fence, while nearly a quarter of all mortgaged home owners were underwater precluding them from selling without incurring a loss. As a result, the quality and diversity of the inventory declined over time. Respondents’ concern about being able to find a home they liked and could afford dipped just after the market decline as the power dynamic swung from sellers to buyers. But by 2010 with a strong Federal stimulus, the inventory on hand was often picked-over and did not meet the needs of prospective buyers. The result of these trends was to create an environment ideal for buying, but with limited options. Respondents were more optimistic on this front than during the height of the housing boom, though.

Nine Years in Retrospect: Conclusions
While the view of a home purchase as a wise financial investment diminished, it remained strong through the housing boom and bust. However, tight lending conditions along with large downpayment requirements and high FICO standards made it difficult for many potential homebuyers, while the sharp price declines put a crimp on home owners’ interest and ability to move. For those with good credit and plenty of cash, the post-boom market was a great time to make an affordable purchase, but even those buyers found that the supply available did not always meet their needs. Tight conditions have weighed on consumers in recent years, but there was a modest thaw by 2011. Consumer confidence improved sharply in the fall of 2011 and both home sales and prices jumped in the spring of 2012. Though respondents to the Market Pulse survey in 2012 and 2013 would likely indicate a more positive sentiment toward employment prospects and housing as an investment, access to credit remains limited and mortgage approval is a high hurdle for many would-be buyers.

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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