In the past five years, lending standards for home mortgages have fallen dramatically. Five years ago many of today's homebuyers would have been laughed out of the bank. Today, the red carpet is rolled out for them. You want a adjustable rate mortgages, option arm, LTV of 103%, with no documentation loan and only have a credit score of 550? Sure. :-) Sign on the dotted line.
"It is true, and lots of lenders have been criticized for it, that some very liberal lending has taken place," said Bill Martin, president and chief executive officer of Nevada State Bank. "It has been my 40-year banking experience that departure from traditional lending standards when in a highly competitive market, especially in good times, prove to be invalid whenever there is tightening in the economy. (RISMedia 10/14/05)"
However, once the boom turns into a bust lending standards are inevitably going to tighten. Interest rates are already going up and lending standards have started to tighten ( albeit slowly). As has been noted by many astute commentators the housing bubble has been fueled to a large degree by the credit bubble.
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IMO, housing is stalling and in places falling moderately due to unaffordability in combination with no new "creative" loan types to make prices more affordable. But as credit tightens it will be impossible to pay today's bubble house prices. In such an environment (of credit tightening), if a seller is going to sell, their only option will be to reduce the price to the point of being affordable. Affordability might now be defined in terms of how easy it is to get credit, but as people's perceptions change on such topics as debt levels, future retirement, having money to do other things for a quality life other than just owning a house, the virtue of actually paying off a mortgage, etc. the amount a seller will have to reduce the price will increase. Here in Marin county, CA, affordability has oscillated up and down since the late 60's (I have a graph of it on my blog) and I see no reason why that will change now.
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