A number of Realtors® responding to the Realtors® Confidence Index March Survey indicated continued tight credit conditions: in a number of cases prospective home buyers had difficulty in qualifying for a loan. A comparison of FICO scores for loan transactions as reported by Realtors® responding to the RCI over the February and March time span compared with FICO scores reported by Fannie Mae’s “Acquisition Profile by Key Product Features”—showing mortgage lending and refinancing conditions in the pre-boom normal housing markets of a few years ago– shows that credit availability to lower scoring applicants appears to have declined. Realtors® provided FICO information based on their understanding of the credit situation; in some cases the information for clients was estimated. However, overall the data seem to substantiate relatively tight credit conditions.
Credit Scores in Current Markets (Variety of Buyers and Lenders) vs. Fannie Mae Credit Mix of 2001-04.
- Weighted FICO scores among Fannie and Freddie mortgages eased a bit in the second quarter of 2011.
- While low credit score mortgages remain a small portion of mortgages, less than one percent, the share of mortgages to high-credit borrowers has declined somewhat and brought down the weighted average credit score at both Fannie and Freddie.
- Average credit scores remain much higher than in the 2005 to 2008 period, but the reversal of the tightening trend given the quality of recent loan performance is a good sign for the housing market.
- What is a credit score? A credit score is meant to reflect a consumer’s risk of not paying money that is borrowed.
- The chart above shows average (yellow) and median (green) credit scores over time. It also shows the cutoff for the 25% with the highest credit scores (red) and lowest credit scores (blue) based on a sample the New York Fed has of consumer credit data.
- The average and median credit scores among consumers have remained roughly constant over the 12 year history of the data. In 1999 the median was just below 700 compared to just above 700 in the first quarter of 2011.
- How do credit scores affect real estate? Buyers seeking financing are evaluated by lenders based in large part on their credit score.
- Check out the blog for other articles on credit scores that show what has happened to the average credit score of FHA and Fannie/Freddie borrowers.
- Composite FICO scores among FHA mortgage endorsements have begun to ease from peak levels in the early part of 2011.
- The average purchase FICO is down to 697 from 703 while the average refinance FICO is down to 695 from 707. FICO scores for both loan types remain nearer to their peaks than their typical average.
- Purchase endorsements had an average FICO score of 633 in 2007 and 658 in 2008. The 2009 average rose to 682 for purchase endorsements and averaged 698 in 2010. In the first months of 2011, scores continued to increase on average reaching 703 for endorsed purchase mortgages.
- Average FICO scores for refinance mortgages rose even more dramatically from just under 620 on average in 2007 to 707 before easing.
Current Confidence Index for Single-Family Homes Steady
The majority of REALTORS® continued to report rising home prices and improving days on the market. However, REALTORS® reported that the market remains hampered by a “demanding and rigid loan qualification process” that has made mortgage underwriting “a nightmare” and “the toughest hurdle.” This has led to cash buyers and investors easing out first time buyers using mortgage financing. Low inventory persists and REALTORS® have reported homes selling above the list price. Policy uncertainty on a variety of economic and and tax issues, mainly due to the tepid job growth and measures to avert the the fiscal cliff — continues to dampen the market. Hurricane Sandy also caused a temporary market slowdown in the affected areas, although a recovery is anticipated in the coming months.
Concerns over the residential home sale market are probably reflective of current economic uncertainties. In fact, the home sales markets have been recovering in price and sales in many areas, and mortgage rates are low—although finding a mortgage may take a number of applications. REALTOR® confidence is well above its level two years ago, and prices and sales are slowly increasing. Assuming that the economy continues and that the fiscal cliff issue is addressed — which is the assumption of most economists — one would expect a continued expansion of home sales.