Home sales have begun to recover from the depths of the great recession.  In the year from mid-2013 to mid-2014, home sale prices rose 5.6% and they are expected to rise another 5% in the next year.  At the time of writing, 30-year fixed mortgages in the Tampa FL area ran 3.99% for borrowers with a FICO score of 740 or better.  Mortgage rates had been almost a point lower during 2013, and they are expected to rise in tandem with the Federal Reserve’s planned increases starting in the third quarter of 2015.

At the trough of home prices in 2012, an unusual number of homes in desirable locations such as Las Vegas and Miami were being sold for cash.  Many cash sales were to offshore buyers, or to speculators, or to buyers who found mortgages hard to obtain.  Among those aged 20 to 34 years, 93% plan to buy a home, and 43% of these young people already are homeowners.  That suggests there is pent-up demand.

Buying in today’s market has been difficult.  Young would-be buyers face the same home prices and interest rates as others, but they typically have less in income and savings, and many have burdensome student debt.

Banks have been persnickety about FICO scores, debt to income levels, and appraisals, largely because of the Consumer Financial Protection Bureau’s (CFPB) implementation of the Dodd-Frank Act components governing mortgages.  High FICO scores are not enough to secure a mortgage for acquiring or refinancing a home.  Banks are afraid that Fannie Mae or Freddie Mac will toss the mortgage back at the bank if the borrower begins slow paying or defaulting.  Banks manifest their fear as obsession with appraisals based on “comparables” even though market activity is still so thin that comparables are not available.

It has been a vicious circle: no sales – no comparables, no comparables – no sales.

To sidestep the comparables issue, a buyer can present a down payment that is higher (say 30%) than the 20% down payment minimum.  A 30% down payment improves the security for the lender and will reduce the debt-to-income ratio.  Unfortunately, at today’s median home price, that extra 10% means another $17,600 in savings has to be accumulated.  From a standing start, the typical 20% down payment takes 12.5 years to accumulate.  Twelve years means today’s average home is beyond reach.

In November 2014, Investor’s Business Daily reported “six regulatory agencies led by the powerful Consumer Financial Protection Bureau officially watered down standards for home loans packaged and sold to investors and Fannie Mae and Freddie Mac as securities. Mortgages with no down payment, weak credit and high debt-to-income ratios will face no legal liability.” This makes home ownership more affordable including for young buyers, but it also returns us to the same slimy-credit conditions that led to the great recession.

At the same time the easy-mortgage plot was being hatched, banks were being forced to beef up their equity and reserves to levels that should preclude any need for a public bailout.

When CFPB gets the easy-mortgage regulations in place and banks comply with the program, the housing market should react vigorously. Those on the lending side will be careful choosing which mortgages to hold, and they will demand a premium in the interest rate commensurate with the renewed risk of many defaults.

Those on the borrowing side ought to secure the home they like with a 5% down payment.  The Federal Reserve’s planned increase in future interest rates and the sudden acceptability of 5% down payments will quickly push up home prices.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research