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High Credit Scores, Low Foreclosures, and the Affordability Puzzle

Foreclosure Trends

Current foreclosure data shows only 47,000 foreclosures initiated in Q3 2024 – a stark contrast to 2008’s crisis levels. This relatively low number reflects the transformed lending landscape following the 2010 qualified mortgage rule. The shift to predominantly 30-year fixed mortgages, combined with multiple refinancing waves (2012, 2016, 2020, and 2021), has created a more stable market.

Credit Score Requirements

The mortgage market has become increasingly selective, with high credit scores dominating approvals. Borrowers with scores below 760 face significant challenges securing financing. This trend particularly impacts first-time home-buyers and those without established credit histories.

Key Market Indicators

Delinquency Status

While overall delinquency rates remained relatively stable in Q3, there’s a concerning uptick in severe delinquencies (90-120+ days). This segment could potentially become future inventory in the housing market.

Loan-to-Value (LTV) Ratios

• 2013: Average LTV was 70%
• Current: Average LTV around 48%

This dramatic shift suggests that home ownership is increasingly dependent on existing equity, creating a significant barrier for new market entrants.

Affordability Crisis

The current market presents severe affordability challenges:

• First-time buyers are stretching their finances dangerously thin
• Rising credit requirements restrict market access
• Increasing delinquency rates signal potential stress

Employment and Federal Reserve Policy

Despite market challenges, employment numbers remain surprisingly strong, showing positive trends dating back to 1940. However, the Federal Reserve’s stance on interest rates remains firm due to:

• Elevated Consumer Price Index
• Persistent housing market inflation

Market Outlook

The disconnect between Federal Reserve policy and market realities is notable. While the Fed aims to control inflation through high borrowing costs, housing prices remain stubbornly high. This suggests that housing inflation is uniquely resistant to traditional monetary policy tools, as it’s largely controlled by market participants’ willingness to adjust prices.

Bottom Line

The current mortgage market reflects a complex interplay of strict lending standards, affordability challenges, and policy responses. While the system may be more stable than in 2008, it has created new barriers to entry and challenges for potential home-buyers.