What’s the new normal for the housing market?
Susan Wachter, Professor of Real Estate and Finance at the University of Pennsylvania, explains the ‘new normal’ in the housing market:
Lizzie O’Leary: “What do you think about the kind of lending standards we have seen post-crisis? Because there’s arguments to be made that lending standards were really lax before the crisis, but then at the same time that now credit is so hard to get for a lot of people. Is there a median point that the economy should try to hit?
Susan Wachter: “Lenders have tightened up. Standards have tightened up. Way beyond where they were in the period before the crisis. As well they should. But they’ve gone beyond that. So, if you compare credit standards today to where they were in 2001, which was a period way before the crisis, where we had earlier decades of lending that [was] reasonable, responsible, sustainable, we’re not there yet. Standards have eased up slightly over this past year, but they’re far tighter than historically were their norm. So, why is that? In part it’s because of the experience of lenders, that if they make a mistake on the loan that loan is coming back to them. Reps and warranties are going to prevail. So they’re being extremely careful. We need a solution to that problem and we’re not there yet, but the solution that we have right now, which is keeping hundreds of thousands of people in renter-ship who would sustainably be able to be home owners- that solution is where we should be pushing towards.”
O’Leary: “Warren Buffet gave an interview a while back in which he said ‘Listen, I don’t think the economy is really going to recover until housing does.’ I know you’re probably not going to like me trying to put a time frame on this, but when could you see housing really come back?”
Wachter: “Well I think housing is going to come back in the new normal frame within a year to two years. That’s not the difficult question. The question of when will housing come back so it brings us to a traditional role in wealth building, in home ownership for families as they begin their family formation period, that’s a much larger issue, and one that I don’t have an answer to.”
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