Fewer people qualify for mortgage as lenders tighten credit in March

Housing market potential fell as a result of the coronavirus-related economic slowdown, forcing lenders to tighten credit standards to ensure borrowers can still make mortgage payments during the crisis.

In March, First American recorded a significant month-over-month drop in market potential for existing-home sales, down 9% to a 4.94 million seasonally adjusted annualized rate (SAAR), its lowest level since 2016.

“The pandemic’s impacts have also influenced our Potential Home Sales Model. Market potential fell in March, as lenders tightened credit due to concern that many economically impacted households will not be able to make their mortgage payments,” said First American Chief Economist Mark Fleming.

A few days ago, JPMorgan Chase announced its decision to increase its minimum credit score to 700 on all new mortgages, as well as raise its down-payment requirement to 20%. This is a huge credit barrier for first-time homebuyers, according to Fleming.

"Many potential first-time homebuyers no longer qualify for a mortgage when credit tightens,” he said. “So, tighter lending standards reduce demand and, in turn, housing market potential."

Annually, housing market potential was down 7.5% or nearly 400,000 potential existing-home sales. Potential existing-home sales are currently 26.6% below pre-recession peak of market potential.

“The coronavirus pandemic continues to take hold of the domestic and global economy. The housing market, although in a better position than it was at the onset of the last recession, will not be immune to the impact,” Fleming said. “Weekly unemployment claims have soared to record highs, which has already contributed to declining consumer confidence.

The market for existing-home sales outperformed its potential by 13.7%, or approximately 678,500 SAAR sales. The performance gap grew by an estimated 565,800 SAAR sales between February and March.

“While income growth may slow, we expect mortgage rates to remain low," Fleming said. "Even with a continued boost in house-buying power, tighter lending standards will make it harder for some borrowers to leverage the market’s low mortgage rates. The contraction in credit availability reduces demand. However, housing supply remains at historically low levels, so house price growth is likely to slow, but it’s unlikely to go negative, as house prices are ‘downside sticky.’ The result? The immediate impact of the coronavirus pandemic on the housing market will be a reduction in spring sales activity and a moderation of price appreciation.”