Credit Tightening Squeezes Out Motivated Home Buyers

Last week the National Association of Realtors (NAR) announced that pending home sales, a measure of contracts (not completed sales), rose 5.3 percent in June. Although this is cited by some as a hopeful sign of housing recovery--others warn the index may obscure limiting factors to completing these deals.

Many economists led with caution warning this rise may be inflated with short-term surges in short-sales and foreclosure purchase activity. Contracts that are often offered at steep discounts and have an unusually high fall-out rate.

Dan Green a loan officer with Mobium Mortgage reminds us that "these are contracts, not closings...the buyers have to be approved and that's getting tougher week by week," arguing it is premature to celebrate "hope for housing."

Meanwhile, the Federal Reserve continues to report broader consumer credit tightening--stretching across home loans into small business and credit cards. Defaults and delinquencies are beginning to spread into prime lending and economic indicators continue to show weakness. In response banks are rapidly tightening lending standards.

Although the Fed recently left the benchmark lending rate unchanged continued tightening indicates the stress that remains in the credit markets.

Unfortunately, the growing conservatism in the market may over correct--squeezing out even creditworthy, motivated home buyers leaving a glut of unsold real estate, further declining home values, and extending a sustained recovery.