Capital Economics expects the housing crisis to end and the overall real estate market to rebound this year primarily because of the loosening of the credit post-recession.
A few things are changing within the credit market that are favorable for borrowers. While the credit score required for a loan remains at round 700 (higher than pre-recession levels), banks are lending larger amounts to people. They are lending up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.
In addition banks are raising their loan-to-value ratios (LTV). If a borrower take out an $80,000 loan on $100,000 house they have an 80% LTV. Capital Economics denotes this as “the clearest sign yet of an improvement in mortgage credit conditions.” In contrast to a low of 74 % LTV reached in mid-2010, banks are now lending at 82% LTV today. While this is all good news for buyers, Capital Economics says “any improvement in credit conditions won’t be significant enough to generate actual house price gains,”.
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