Lenders Relaxing Credit Rules as Home Prices Rise
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Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. Higher home prices and rising mortgage rates are pricing many consumers out of the market. So how are lenders responding? We'll take a look in a moment. First, these money headlines.
How are rising home prices and mortgage rates pricing buyers out of the market?
A gauge of U.S. business prices grew more than expected in March, the latest sign that inflation pressures may be building in the economy. The producer price index, a measure of the prices businesses receive for their goods and services, rose a seasonally adjusted 0.3 percent in March from a month earlier. It was a surprise to economists because of the sharp rise in food prices and continued robust price growth in the services sector. Final demand food prices ballooned 2.2 percent in March. That's the largest one-month increase in about four years. Meantime, bananas are the most widely eaten fresh fruit in the U.S., and many retailers have tried to avoid passing on higher costs onto shoppers. For many supermarkets and other stores, bananas drive trips to the store because they're an item that most people go out to purchase rather than buy online.
Consumers have largely been insulated from wholesale banana prices in the U.S., rising 15.5%. in the first two months of 2018 to about 57 cents a pound.
What short-term news about inflation and producer prices set the economic backdrop?
That's an all-time high brought on by the weather phenomenon known as La Nina, upending weather patterns. That was coupled with floods, cooler temperatures, and mudslides in countries including Costa Rica and Guatemala that have hurt banana crop yields in recent months. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. Is there such a thing as too much of a good thing? Well, there is in the U.S. housing market. It wasn't long ago that housing market observers longed for the day when prices would climb to trigger movement and encourage buyers and sellers to enter the market. Well, now prices are so hot, homes are out of reach for many buyers, and Wall Street Journal reporter Laura Casisto is here to analyze.
So, Laura, with a slew of factors pricing some potential buyers out of the market and lenders having to relax credit standards as a result, is this kind of like the tail wagging the dog?
Yeah, so I think we are always, as you say, we are always happy to see prices rising. It's certainly good for existing homeowners. But we have this challenge now where we're seeing a lot of buyers being locked out of the market. And lenders are responding by relaxing these debt to income ratios, allowing people to take on more debt. And there's a logic to it, right? Because you have millennials with high levels of student debt, and you have home prices rising, and we want to make homes accessible to people. But there's always that concern whenever we see debt levels creeping up that if we have another downturn, if we see home prices fall, that you've got people in a kind of precarious position.
You know, not to make any predictions here, but by extending loans to consumers who would be classified as subprime, outside really the prime sweet spot in terms of their earnings and their credit and such, some would say we're wading back into the waters that preceded the recession 10 years ago. It's almost like it's getting lenders and the banks in trouble again.
Certainly if you look at the data about debt-to-income ratios, we're now back up to 2004, 2005 levels. And we should be clear, we're still well below 2008 levels, which is when we saw debt really spiral out of control in the housing market. But you're seeing it creep back up and creeping back up towards those bubble levels. What lenders and what Fannie Mae and Freddie Mac would say is, this time is different, that they have put in place other safeguards to make sure that people who are getting these very large loans, these loans that are eating up a lot of their income, that these people have maybe very high credit scores, they have loan payments and reserves. They're trying to use technology especially to put in place safeguards, and only time will tell if they're strong enough.
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