A Potential Housing Crash? Not With Today's Lending Standards

As a potential home buyer in Colorado Springs (or surrounding areas) you might be apprehensive that we're heading towards a housing crash, but there are many factors that differentiate the current housing market from the one in 2008. One significant distinction is the lending standards of today. Here's a data-driven perspective to underline the difference.

The Mortgage Bankers Association (MBA) monthly publishes the Mortgage Credit Availability Index (MCAI). According to their website:

 "The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is...a summary measure which indicates the availability of mortgage credit at a point in time."

Essentially, this index illustrates how easy or difficult it is to secure a mortgage. The graph below, displaying the MCAI since its inception in 2004, indicates the evolution of lending standards. The interpretation works as follows:

    When lending standards are relaxed, securing a mortgage is easier, and the index (represented by the green line in the graph) is higher.
    When lending standards are strict, obtaining a mortgage is tougher, and the line representing the index is lower.

In 2004, the index hovered around 400. However, by 2006, it had escalated to over 850. Today's scenario, however, is quite the contrary. Post-crash, the index declined as lending standards became more stringent, implying that obtaining a mortgage today is more challenging.

Loose Lending Standards Aided the Housing Bubble

One of the primary factors contributing to the housing bubble was the relatively relaxed lending standards of the time. Realtor.com explains:

"In the early 2000s, it wasn't exactly hard to snag a home mortgage... plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn't actually afford homeownership."

The significant peak in the above graph indicates that prior to the housing crisis, credit was easily obtainable, and the prerequisites for loan approval were relatively lax. Credit was broadly accessible, and the qualifying threshold for a loan was low.

Lenders were approving loans without always verifying the borrower's ability to repay the loan. This means creditors were lending to a higher number of borrowers who were more likely to default on their loans.

Today's Loans: A Tougher Proposition Than in the Past

As noted, lending standards have considerably changed since then. Bankrate delineates the difference:

"Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit."

Looking at the graph again, it's clear that post the housing crash peak, the index line dramatically plummeted and has remained low since. In fact, the line is significantly below the 2004 standards – and it's still declining. Joel Kan, VP and Deputy Chief Economist at MBA, provides the latest update from May:

"Mortgage credit availability decreased for the third consecutive month... With the decline in availability, the MCAI is now at its lowest level since January 2013."

The declining index suggests that lending standards are becoming stricter, clearly indicating we're far removed from the extreme lending practices that led to the crash. As a Colorado Springs home buyer working with a top Colorado Springs real estate agent, you'll see this as a positive change.
Bottom Line

Before the housing crash, lending standards were notably lax with little evaluation conducted to assess a borrower's ability to repay their loan. Today, the rules are stricter, reducing the risk for both lenders and borrowers. This indicates that we're dealing with two starkly different housing markets, and the current market isn't a replication of the last one. Your Colorado Springs Realtor® can help guide you through this market with knowledge and expertise.

If you're ready to find a home that meets your needs, let's connect! Top Colorado Springs real estate agent: 719-434-7525

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