|Back in 2005, Federal Reserve Chairman Alan Greenspan described the dramatic increases in residential real estate values as a “froth in housing markets.” Greenspan went on to say:
Greenspan was warning that the loosening of lending standards could lead to disaster. And it did.
With home prices again appreciating at percentages well above historic norms, many are wondering whether the market is again becoming “frothy.” Mortgage standards are much stricter now, however, than they were in 2005.
The Urban Institute’s Housing Finance Policy Center issues a monthly index which measures the percentage of home purchase loans that are likely to default. A lower score indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards. A higher score indicates that lenders are willing to tolerate defaults and are taking more risks.
Their July Housing Credit Availability Index revealed credit availability rose to 5.9%. For context, they went on to explain:
Here is a graph depicting the Urban Institute’s findings:
Though it may be slightly easier to get a mortgage today than it was a year ago, lending standards are nowhere near where they were during the build-up to the housing bubble.