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Prices outstrip affordability; FICO slips; Housing boom dips 😬

By July 28, 2021 No Comments

Home price gains cancel out home affordability gains

House prices rose nationwide in May, up 1.7 percent from the previous month, according to the latest Federal Housing Finance Agency House Price Index. House prices rose 18 percent from May 2020 to May 2021

The previously reported 1.8 percent price change for April 2021 was unrevised.

For the nine census divisions, seasonally adjusted monthly house price changes from April 2021 to May 2021 ranged from +1 percent in the Middle Atlantic division to +2.4 percent in the Pacific division.  The 12-month changes ranged from +15.4 percent in the West South Central division to +23.2 percent in the Mountain division.

“House prices continued their record-setting growth into May,” said Dr. Lynn Fisher, FHFA's Deputy Director of the Division of Research and Statistics. “This trend will likely continue around the country as busy summer homebuying months maintain the pressure being felt in already tight housing markets.”

Unfortunately, housing affordability declined on a year-over-year basis for the third month in a row in May, following a two-year streak of rising affordability, according to a recent analysis by First American.

The decline in May occurred even as two of the three key drivers of the Real House Price Index (RHPI), household income and mortgage rates, swung in favor of greater affordability relative to one year ago.

House-buying power increased by 8 percent in May compared with a year ago, propelled by lower mortgage rates and higher household income. 

The affordability gains from house-buying power, however, were offset by the third component of the RHPI, nominal house price appreciation, which reached a record 18 percent in May, surpassing the previous peak from 2005.

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FICO Score’s Hold on the Credit Market Is Slipping

For decades, nearly every consumer credit decision revolved around a three-digit number—the FICO credit score. That is changing (WSJ paywall).

FICO has long dominated the market for consumer credit, providing scores for some 200 million U.S. consumers that are used by a whole host of lenders to evaluate credit-card, auto-loan and mortgage applicants. For borrowers, higher scores can mean bigger loans and lower interest rates.

Also, housing-finance giants Fannie Mae and Freddie Mac are considering allowing lenders to use other scores when evaluating mortgage applicants.

There are a few reasons for the shift. 

Many lenders now review a wealth of new data and use it to refine their own proprietary scores that they say are better able to predict who will repay and who won’t. 

Regulators are concerned that FICO leaves too many Americans behind, limiting them to payday loans and other costly forms of credit. Some 53 million U.S. adults lack traditional FICO scores because they have thin or nonexistent borrowing histories.

“FICO scores are good, but they’re not perfect,” said Roger Hochschild, chief executive of Discover Financial Services. The company relies less on FICO scores when evaluating existing or prior customers and more when applicants are brand-new to Discover, he said.

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Housing boom is over as new home sales fall to pandemic low

Sales of newly built homes dropped in June to the lowest level since the early days of the coronavirus pandemic in April 2020, according to data released by the U.S. Census Bureau on Monday.

Sales of new single family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000 and 19.4% below the June 2020 level of 839,000. Analysts were expecting new home sales to increase by 3.4% in June.

“We also know there are shortages of appliances, labor and affordable lots,” noted Peter Boockvar, chief investment officer at the Bleakley Advisory Group in an interview with CNBC’s Diana Olick. “The moderation in home sales is likely a combination of sticker shock and the slowdown in the ability of builders to finish homes because of a variety of delays.”

While there is unquestionably still strong demand from buyers, much of it is being squelched by affordability and supply issues. Those signs clearly showed up at builder home sites in June and have been a factor in weakening homebuilder sentiment for the past two months. Noted builder analyst Ivy Zelman wrote as much in a note last month.

“We are shifting our tone on the housing market based on our analysis of proprietary data showing early signs of a cool down,” according to the note.

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