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Real Estate Research provided analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog included the Atlanta Fed's Jessica Dill, Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.

In December 2020, content from Real Estate Research became part of Policy Hub. Future articles will be released in Policy Hub: Macroblog.

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March 25, 2015

Where Is the Credit Availability Pendulum Now? (Part 2 of 2)

In our previous post, we considered survey-based and index measures of mortgage credit availability. We concluded that availability has slowly but steadily been improving since early 2013. In this post, we focus on borrower characteristics for originated mortgages. We think of availability of credit as the willingness of lenders to lend while borrower characteristics shape the quantity of purchasers that are qualified to buy. By turning to mortgage origination data, we can look at the “credit box” and track changes (that is, expansions and contractions) in the credit box over time. We do this acknowledging that this approach fails to capture variation in loans that have been declined and allows us only to observe variation in loans that have been originated.

Looking at trends in credit characteristics of purchase mortgages originations, we find data that support the idea that the credit box, which tightened during the Great Recession, has not gotten looser. For one, the distribution of FICO scores on conventional mortgages shifted during the housing downturn to a distribution dominated by borrowers with higher credit scores—those above 680—and has yet to show much movement in the other direction.


Yet credit scores represent just one dimension of a multidimensional credit box. To paint a fuller picture, consider loan-to-value (LTV) ratios before and after the housing downturn. The table shows summary statistics of this data. Comparing the distributions of LTV ratios of mortgages originated in 2006 and 2014, it seems somewhat counterintuitive that the share of conventional mortgages with high LTVs was greater in 2014 (35.3 percent) than in 2006 (21.2 percent).


Layering the distribution of FICO scores on the distribution of LTVs helps to explain away some of this peculiarity. A sizable share of the 2006 loans that were originated with an LTV greater than 80 percent fell on the lower end of the credit score spectrum. In contrast, most of the loans originated in 2014 with LTVs greater than 80 percent fell on the higher end of the credit score distribution.

One thing that is not in our data set is the extent to which these mortgages had piggyback mortgages. Data provided by Inside Mortgage Finance indicates that second-mortgage originations decreased from $430 billion in 2006 to $59 billion in 2013 (the most recent year for which data are available). That is, seconds shrank from 14 percent of total originations to just 3 percent of total originations. So it is possible that the share of conventional mortgages with an LTV greater than 80 percent is understated—especially in 2006.

So what are the takeaways? Clearly, there has been a shift in conventional mortgage originations towards borrowers with better credit records. Also, we have to be careful in interpreting the trend in LTV ratios when information on second and third liens is not available. Finally, while survey-based and index measures of availability of credit may be improving, evidence from borrower characteristics of originated mortgages tells a less compelling story and suggests the pendulum still has some distance to go before we can consider it in the loosening range.

Photo of Carl Hudson By Carl Hudson, director for the Center for Real Estate Analytics in the Atlanta Fed´s research department, and


Photo of Jessica DillJessica Dill, senior economic research analyst in the Atlanta Fed's research department

February 25, 2015

Has the Pendulum Swung Back to Neutral? Looking at Credit Availability

Statements since March 2014 from the Federal Open Market Committee, including the last one, indicate that the recovery in the housing sector remains slow. Last year, when the Atlanta Fed looked at measures of housing affordability (see, for example, these posts from the Atlanta Fed blogs macroblog, SouthPoint, and Real Estate Research ), we concluded that in light of the still relatively high readings of affordability measures, it was likely that some other factor was the main culprit in dampening the housing recovery. Access to credit is not included in affordability measures, so in this post, we turn our attention to the question of whether financing might be a headwind to a more robust housing recovery.

The availability of credit is an important driver of housing market activity. During the downturn, our contacts often mentioned that the pendulum had swung too far in the direction of looseness when economic times were good. And during the recovery, they said the pendulum had swung too far in the direction of tightness. In this post, we'll discuss several indicators of credit availability and answer the question, where does the credit availability pendulum hang now?

First, let's look at the Atlanta Fed's monthly poll* of residential brokers and home builders. Beginning with the late 2012 poll, we occasionally included a special question for our panel of real estate business contacts about how available they perceived credit to be. When the Consumer Financial Protection Bureau's (CFPB) Qualified Mortgage (QM) rule went into effect in January 2014, we began asking the credit availability question every month to pick up on subtle changes in perceptions. (The dots on the blue line in chart 1 show the frequency of the question.)

Results from the latest poll suggest that mortgage credit availability is improving. A growing share of business contacts (three-fourths of residential brokers and two-thirds of home builders) reported that the amount of available mortgage finance was sufficient to meet demand. To track the direction of the trend over time, we charted the results in the form of a diffusion index (see the blue line in chart1). A diffusion index value greater than zero signifies that the majority of builders and agents reported that there is enough available credit to meet demand, while a value less than zero signifies that the majority do not believe available credit is sufficient to meet demand. The chart clearly shows that many builders and agents believe there is enough available credit.

Second, let's consider the Mortgage Credit Availability Index (MCAI) that the Mortgage Bankers Association produces on a monthly basis (the green line in chart 1). The MCAI is an index constructed using underwriting criteria from more than 95 lenders and investors. Even though the diffusion index is a qualitative measure and the MCAI is a quantitative measure, the series are highly correlated (ρ=0.73), and both suggest that credit availability has been slowly but steadily improving since early 2013.


Third is the Federal Reserve Board's Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), which polls large domestic and foreign banks every quarter about demand for and the availability of credit. In the SLOOS, banks are asked to indicate whether credit standards for approving mortgage loan applications have tightened, remained unchanged, or eased over the past three months. The latest results, shown in chart 2, reflect recently introduced categories that align with the Consumer Financial Protection Bureau's qualified mortgage rule. Like the previous two series, seen in chart 1, the SLOOS also appears to suggest that lending standards have eased. Note that the net tightening response for prime lending is loosening by a similar or greater magnitude as it did some years during the boom—2006, for example.


So has the credit availability pendulum returned to its neutral resting position? It's hard to say for certain, but there is clearly evidence to suggest that it is at least slowly moving in that direction.

*The monthly poll of brokers and builders was conducted January 12–21, 2015, and reflects conditions in December 2014. Fifty-seven business contacts around the Southeast participated: 23 homebuilders and 34 residential brokers. To explore the latest results in more detail, visit the Construction and Real Estate Survey web page.

Photo of Jessica DillBy Jessica Dill, senior economic research analyst in the Atlanta Fed's research department

June 11, 2014

Signs Point to Slow but Steady Construction Growth

After bottoming out in early 2011 and following an upward trend for two years, national new house sales on a seasonally adjusted basis have been essentially flat since January 2013 and are at a pace about half that of 2000–01. Over the past month, speeches by Fed Chair Janet Yellen and Reserve Bank presidents John Williams, William Dudley, and Charles Plosser have included references to a slowing housing sector in the face of strong fundamentals as a source of economic uncertainty. They mentioned many reasons for the slow pace of housing´s recovery, including difficulties in increasing housing supply (that is, construction).

In the Southeast, we hear from our housing contacts that it remains difficult to acquire construction financing and that funding of land acquisition and development projects is extremely difficult. In the most recent Southeast Housing Market Poll, most builders continued to report that the amount of available construction and development finance fell short of demand (see the chart). Concern regarding the lack of readily available construction financing is not unique to the Southeast and may be part of the reason for the recent slowing in the housing sector. Fortunately, it appears that construction financing may in fact be getting a bit more accessible.

How Available Do You Perceive Construction

A key input to construction is the availability of financing. We explored construction lending trends in a few of our posts last year (here and here). The most recent bank lending data indicate several reasons to believe that banks continue to return to construction and development as a line of business.

Aggregate bank construction and development lending remains well below its 2008 peak (see the table). That said, more than half of the banks with a construction business line are expanding their single-family residential construction lending. Interestingly, the median March 2013 year-over-year growth rate in residential construction lending was positive, yet aggregate 1–4 family construction loans fell from March 2012 to March 2013, which means that lots of smaller lenders were growing. The good news is that the March level of 1–4 family construction loans increased in 2014 for the first time since the recession ended.

Bank Call Reports

Although banks appear to be lending for residential construction (the "vertical" part of homebuilding), we cannot say the same for lot development (the "horizontal" portion). The data is a bit less clear on this front because lending for raw land and land development is lumped together with loans for all construction that is not for 1–4 family structures. Aggregate lending for "other construction, all land development and other land" increased year over year, but the median growth rate was negative. That is, more banks are pulling back from this activity than are growing, but the ones that are growing are the ones with larger volumes. Considering that lenders have viewed multifamily construction favorably, it is more likely that the growth in lending is attributable to multifamily loans rather than to lot acquisition and development.

The Fed presidents I mentioned in the first paragraph were optimistic about housing in large part because population growth and household formation both point to an inevitable increase in housing demand. The evidence from bank construction lending supports this idea that growth will continue, but it also suggests that the recovery will continue at its slow and steady pace.

Photo of Carl HudsonBy Carl Hudson, Director, Center for Real Estate Analytics in the Atlanta Fed´s research department

August 9, 2013

Recent Trends in Bank Construction Lending and Sentiment

One of the big questions for the economic recovery is the extent to which the improvement in the housing sector is sustainable. The statements from the Federal Open Market Committee (FOMC) over the past three years reveal an interesting evolution in the way the Committee views housing activity. Consider the subtle changes:

- 06/2009: Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.
- 09/2009: [A]ctivity in the housing sector has increased.
- 11/2009: Activity in the housing sector has increased over recent months.
- 12/2009: The housing sector has shown some signs of improvement over recent months.
- 03/2010: [I]nvestment in nonresidential structures is declining, housing starts have been flat at a depressed level.
- 04/2010: Housing starts have edged up but remain at a depressed level.
- 06/2010: Housing starts remain at a depressed level.
- 09/2010: Housing starts are at a depressed level.
- 11/2010: Housing starts continue to be depressed.
- 12/2010: The housing sector continues to be depressed.
- 08/2011: [T]he housing sector remains depressed.
- 04/2012: Despite some signs of improvement, the housing sector remains depressed.
- 08/2012: Despite some further signs of improvement, the housing sector remains depressed.
- 09/2012: The housing sector has shown some further signs of improvement, albeit from a depressed level.
- 12/2012: [A]nd the housing sector has shown further signs of improvement....
- 01/2013: [T]he housing sector has shown further improvement.
- 03/2013: [T]he housing sector has strengthened further....
- 07/2013: [T]he housing sector has been strengthening....

I'll leave the exact parsing of FOMC statements to private experts. What I want to address is the way banks are reacting, or perhaps contributing or being less of a barrier, to the strengthening housing sector.

In my July 10 posting, I discussed the correlation between bank construction lending and residential construction activity—larger changes in construction lending are associated with a higher level of construction put in place. Last week the Census Bureau reported that total construction spending fell. The good news is that residential construction, on a seasonally adjusted annual rate, was essentially flat from May to June and was up significantly compared to June 2012. So is bank behavior consistent with improving residential construction spending? Two sources help to shed light on what banks are thinking and doing: the Senior Loan Officer Opinion Survey (SLOOS) and bank call reports as of June 30, 2013.

The SLOOS asks how the respondent banks' credit standards for approving applications for commercial real estate loans (CRE) loans have changed over the past three months. Since 2011Q2, the net percentage of domestic banks tightening standards for CRE loans has been negative, which indicates loosening (see the chart). CRE, however, includes not only loans for construction and land development (C&D), but also loans secured by nonfarm, nonresidential properties and multifamily residential properties. The latter two loan types finance existing structures rather than construction activity, thus it is impossible to determine whether the loosening since 2011 applies to construction lending.


Fortunately, the most recent SLOOS had special questions that asked for the changes in standards and demand over the past 12 months for the three different types of CRE loans: C&D loans, loans secured by nonfarm nonresidential properties, and loans secured by multifamily residential properties.


Though on net the standards for all CRE loans type appear to be loosening, multifamily and nonresidential loans are likely to have been the drivers of the easing of overall CRE standards since 2011Q2. Unfortunately, because these were special questions, there is no time series to aid with putting the responses in context.

Do actions speak louder than words?
Ideally, to gauge bank lending activity, we would look at the volume of new construction loans—new loans enable new activity. What we observe, however, is total C&D loans outstanding—which net out loan payoffs, write-downs, and reclassifications—continue to be decreasing in aggregate. In contrast to the overall industry where the top 100 banks account for 80 percent of total bank assets, the top 100 C&D lenders, which are not necessarily the top 100 banks, account for only 60 percent of bank C&D lending. Given the available data and the fact that smaller banks are relatively more important in the C&D space, the percentage of banks that are increasing their construction lending may be a better indicator of changing sentiment (see table below).


With 48.1 percent of banks reporting year-over-year growth in C&D loans, activity cannot be classified as robust, but neither is it bouncing along the bottom. Not that we should aspire to the frothy levels of C&D lending that prevailed during the housing bubble, but compared to 2010, it is clear that more banks are reentering the C&D market, which bodes well for housing starts and construction spending going forward.

Photo of Carl HudsonBy Carl Hudson, director of the Center for Real Estate Analytics in the Atlanta Fed's research department