Robert Samuelson muses over why the housing market continues to lag:
WASHINGTON — One of today’s economic puzzles is why the Federal Reserve’s low interest rates haven’t spurred a stronger recovery. A partial answer lies in the beleaguered housing market, which is a crucial channel through which low rates operate. Although housing has rebounded, the revival has been muted by banks’ tougher lending practices. Low interest rates don’t matter if lenders won’t lend or lend only to ultra-safe borrowers. Fed Chairman Ben Bernanke often complains of overly tight mortgage credit standards. But some of the toughness turns out to be the unintended side effects of other government policies designed to punish banks for the financial crisis.
Down in the housing market’s trenches, the shift in credit standards has been stunning. At the bubble’s height, “we had times when banks were lending if you had a birth certificate,” says Maria Wells, a Florida real estate broker. Now, she says, banks are so obsessed with making safe mortgages that the approval process drags on endlessly, and lenders routinely make last-minute demands for higher down payments or more documents (proof of income, payment history). “Sometimes deals don’t close,” she says. “Half of our sales are all cash.”
A risk-averse bank doesn’t lend. The more the Federal Reserve preserves risk-free ways of earning money for banks, the more risk-averse they will remain.