Relaxed credit standards and job growth bringing back the retail and first-time home buyer?

Last December, I wrote about a slow but steady housing rebound that seemed to suggest an even stronger 2015, and this is certainly still the case.  However, more updated economic information from the fourth quarter of 2014 and the first part of 2015 seem to point to a different type of animal:  Look for 2015 to be the year that we see the continued return of the retail buyer, and especially the first-time home buyer.

During the depths of the Great Recession, perhaps the single most important saving grace which led us out of the crisis were investors who realized that the crash in home prices meant that many owner-occupied homes were excellent rental property investments.  Their purchases of millions of otherwise vacant homes helped to establish a pricing floor for foreclosed properties.  However, by the end of 2013, rising prices and more competitive supply for these homes meant declining profits for these investors, so they gradually disappeared from the market through the middle of 2014.

At the time, traditional buyers who live in these homes – also known as retail buyers – were not yet ready to fill the gap due to a combination of tight credit, lack of down payments and a job market which was improving but still had yet to impact wage growth.  Since then, however, several important factors have changed, mostly due to a strengthening job market and the relaxing of credit standards.

For all of 2014, almost three million new jobs were added – the most since 1999, which was the peak of in the first phase of the Internet-related technology boom.  And, while many of these jobs were simply replacing the millions lost during the previous recession, these gains were across the board and included multiple industries.  During the last quarter of 2014, nearly 290,000 jobs were created per month, and in January 2015 another 257,000 jobs were added.

However, even with these impressive gains, during 2014 wage growth barely budged over two percent, which meant that employees simply didn’t have extra cash to use for down payments.  Until the prime-age employment-to-population ratio rises from the current 77.2 to closer to 80 percent, the U.S. economy likely won’t see consistent and meaningful wage growth.

It is mainly due to this weakness in wage growth – along with inflation that remains below its target of two percent and the decline in GDP growth during the fourth quarter of 2014 -- that Federal Reserve Chair Janet Yellen has continued to postpone any hike in short-term interest rates.

Despite the sluggishness in wage growth, consumer spending did rebound strongly in 2014, adding 1.7 percentage points to overall GDP growth and posting the best showing since 2006.  And while GDP growth was much faster in the middle of the year before slowing to 2.2 percent in the fourth quarter of 2014, much of that slowing was due to an increase in imports related to increased consumer spending and a decline in federal government spending.

For lenders, one way for them to encourage the return of the retail buyer is to relax lending standards – helped in large part by FHA, Fannie and Freddie.  Last December, FannieMae launched its own program for first-time homebuyers with FICO scores as low as 620, limited cash-out refinances, and down payments of just three percent.  FreddieMac punted the start of its own low-down payment program until March 23, requiring borrowers to first seek credit counseling and setting its own FICO floor at 660.  Meanwhile, FHA has lowered its MIP insurance for 30-year mortgages to just 0.85 percent that, when combined with low interest rates, provides the lowest-cost effective financing available in its 80-year history.

For home builders, these changes bode well for 2015, with NAHB’s Leading Markets Index moving up to .90 in the fourth quarter of 2014, which means that the national housing market is back to 90 percent of normal economic and housing activity.  Of the 360 metro areas tracked by this index, 80 percent saw increases during the quarter.  At the same time, NAHB’s Housing Opportunity Index also showed housing affordability rising to nearly 63 percent, due largely to lower interest rates and some lower-priced housing inventory.

Fortunately, construction lenders have also taken notice, with the stock of AD&C loans made by FDIC-insured institutions rising by 17 percent between the fourth quarters of 2013 and 2014.   Even with such lending still strongly subdued from the peak of 2008, this gradual thawing could help provide much-needed inventory for the first-time buyers waiting in the wings.