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Normalizing housing market conditions such as home sales increasing, prices rising, credit access easing, and private capital gradually returning appear to be imminent signs of a full recovery. However, contradicting data such as tight credit, high delinquencies, and taxpayers still backing most of the mortgage market reveal otherwise.
Karan Kaul, research associate at the Urban Institute [2] addressed the looming questions surrounding the housing market health in a report [3]released Monday, determining that no single indicator can gauge market health.
According to the report, in 2001, home prices were rising moderately, mortgage credit was easier to obtain, underwriting was sound, private capital was abundant, and default and foreclosure rates were low. Compared to today's market, this was definitely a healthy housing market.
- The government has a much larger share of the market. In 2001, the Federal Housing Administration, (FHA) Department of Veterans Affairs (VA), and the government sponsored enterprises together backed about 52 percent of all first-lien mortgage origination while private capital financed the remainder. In 2014, the government-backed share was 71 percent after peaking at nearly 90 percent in 2009.
- It’s much harder to qualify for a mortgage. The default risk of mortgages originated in 2001 was about 12.5 percent. As the housing bubble began inflating along with riskier lending, the expected default risk increased to nearly 17 percent. Post-crisis however, as lenders switched to originating only the safest mortgages, the expected default risk fell rapidly to just 4.6 percent in 2013. Access to credit has since started to improve slowly with default risk increasing to 5.7 percent in early 2015.
- There are fewer mortgages being originated. Approximately 4.7 million first-lien purchase mortgages were originated in 2001. In contrast in 2013, the latest year for which HDMA data are available, only 3 million such mortgages were originated. Our previous research shows that a big reason for this decline is the extraordinarily tight lending standards of the post-crisis period.
- The rate of seriously delinquent mortgages is much higher. Although the rate of seriously delinquent mortgages has declined recently as house prices have recovered, it still remains high relative to 2001. Loans that are more than 90-days delinquent or in foreclosure comprised 4.2 percent of all outstanding mortgages in the first quarter of 2015, down from nearly 10 percent in 2009, but still elevated from 2.4 percent in 2001.
"We continue to move in the right direction, but progress has been uneven," Kaul said. "So how will we know when the mortgage market has recovered enough and is healthy once again? When the government share of the mortgage market is closer to 50 percent, when the expected default risk is closer to 12.5 percent, when first-lien mortgage originations are closer to 5 million, and when the rate of seriously delinquent mortgages is closer to 2.4 percent. In other words, when it looks more like 2001."