Tight Credit Restricts Housing Market

Published

February 28, 2013

Credit.com is the only company of its kind to be founded and run by leading credit experts including journalists, authors and consumer advocates. We're committed to helping consumers understand and master the confusing world of credit and improve their financial standing by recommending products and actions that are in their best interest.

In the wake of the recent recession, many banks significantly reined in the availability of credit to protect themselves from the wave of defaults that were plaguing consumers and businesses nationwide. But since the downturn ended, credit has remained tight for companies and individuals alike, and could now be curtailing growth in the housing market.

National home prices have been improving over the last year, thanks to higher-than-normal consumer demand as a result of affordable home prices. However, the recovery could be going even better if buyers and builders were able to have access to credit, according to a report from the National Association of Home Builders. Tight lending restrictions are likely keeping many would-be buyers with strong credit standings from entering the housing market, which could result in artificially driving prices higher for the properties currently on the market.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Meanwhile, builders are likely experiencing the same problems related to obtaining credit, which makes it more difficult for them to begin projects, the report said. That, in turn, restricts the number of homes being built nationwide, which might otherwise be able to meet some of the pent-up buyer demand and make home prices grow at a more sustainable rate. In particular, areas where price increases have been more appreciable could be hardest hit by the tight credit.

“Though some metros are still struggling to recover, conditions in a growing number of markets are improving, and those are the areas where we should be hiring construction crews at a healthy clip,” said NAHB Chairman Rick Judson. “Unfortunately, new-home production is facing a number of obstacles and failing to bounce back at a more robust rate. Builders can’t obtain financing to construct new homes and developers have not been able to restart the lot production pipeline because of the lack of credit, which is contributing to buildable lot shortages in some markets.”

[Featured Products: Research and Compare Mortgage Rates at Credit.com]

Numerous studies have shown that home values have risen between 6 and 7 percent over the last year or more, and experts fear that such growth could lead to another housing bubble, even if it is expected to taper off somewhat over the course of the coming year and be closer to 3 or 4 percent.

Image: iStockphoto