Will America’s housing boom lead to another financial crisis?


A FAVOURED PASTIME for city dwellers on holiday to quainter towns and villages is to peruse the windows of local property firms and dream of swapping their cramped two-bedroom flat for an entire house and garden. Your correspondent is not immune to the appeal: she gazed wistfully at a pretty house near the Deschutes river in Bend, Oregon, situated among the lakes and peaks of the Cascade mountains (pictured). She dutifully checked the listing price on Zillow, a real-estate platform, only to face grim reality: the three-bedroom house was worth $1.25m, a 44% increase from a year earlier, yielding a price per square foot higher than Queens and most of Washington, DC.

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It is hard not to feel unease at the spectacle America’s housing market is making of itself. House prices have risen 13% on the year, the biggest jump since before the 2007-09 financial crisis. Inventories of homes for sale have plummeted: there are so few on offer in America that there are currently more agents than there are listings. The typical home sells in 17 days, a record low, for 1.7% more than its asking price, a record high. When Redfin, another property platform, conducted its annual survey of around 2,000 homebuyers, 63% reported having bid for a home they had not seen in person. The last boom in house prices was followed by a deep and painful recession. Is history likely to repeat itself?

Consider the mixed news first. The average loan to value of a new mortgage in America is a reasonable-sounding 83%. On the reassuring side, this figure has not crept higher even as prices have soared. The worrying aspect is that borrowers are bifurcated. If a homebuyer can put up 20% of the value of a property, they do not have to buy private mortgage insurance. As such around 40% of borrowers make a 20% or greater down-payment. Most of the rest—more than half—put down less than 10%. Given how rapidly prices in some markets have soared, a house-price slump could leave some of them underwater.

And yet compared with the past, borrowers are in much better financial shape. Just a quarter of mortgages originated between 2004 and 2007 were for people with “very good” credit scores (above 760). An eighth of borrowers were “subprime”, with scores below 620. Standards are higher now. In 2019 60% of mortgages were made to those with scores above 760. This share climbed further during the covid-19 pandemic as banks, fearing losses, tightened lending standards: 73% of mortgages made in the first quarter of 2021 went to borrowers with very good credit scores. Just 1.4% went to subprime borrowers.

There is anecdotal evidence of caution from mortgage bankers, too. They are reputedly calling up workplaces to ensure that employees relocating out of the big,…



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