A Tale Of Two Economies: Cars And Houses

It's said that the two biggest purchases in a consumer's life are apt to be an automobile and a home. In the aftermath of the Great Recession, consumers are buying cars and trucks again, but they aren't buying homes.

In separate reports last week, the automakers reported strong new car sales for April, while data from Clear Capital suggests housing has fallen into a double dip recession. Why the disparity?

Aside from the fact that cars, while expensive, cost less than houses, more consumers may be buying cars because it's easier to get a car loan than a mortgage. New car financing has less stringent requirements than do home loans.

Easier to buy a car

Consumers with credit scores in the 600s qualify for auto financing, while lenders require much higher credit scores in order to obtain a mortgage. The Federal Reserve recently estimated that 25 percent of consumers who apply for a mortgage are turned down.

But if banks will loan a consumer money to buy a car, why won't they loan money to that same consumer to buy a house? It may have to do with the rocky situation at two government supported enterprises, Fannie Mae and Freddie Mac.

When a lender writes a mortgage, they immediately turn around and sell it to Fannie or Freddie. The mortgage is bundled with others and sold as securities to investors, who receive a guarantee from Fannie and Freddie against default.

Burned by the subprime collapse

When subprime mortgages began to default a few years ago, it took a huge toll on Fannie and Freddie, and that toll continues to mount up today. Last week Fannie had to ask Congress for another $8.5 billion to cover continuing losses on home loans.

In a defensive reaction, Fannie and Freddie both implemented tougher standards for any mortgages that they would purchase. They demanded big down payments and high credit scores from borrowers.

Since Fannie and Freddie buy nearly all the mortgages sold in the U.S., lenders who want to sell those mortgages must adopt those standards too. But in doing so, they may be making a bad situation worse.

If fewer people can qualify for a loan, fewer homes are sold. If an owner can't sell their home, they must lower the price. If they can't sell their home and they lose their income, the result is likely to be another foreclosure. And that puts still more pressure on Fannie and Freddie.

Fannie Mae reported last week that it lost $8.7 billion in the first quarter of the year, mainly because it had to make good on mortgages gone bad.

More owners under water

The latest data suggests the problem is getting worse, not better. Real estate website Zillow.com reports more than 28 percent of U.S. Homeowners were “under water” in the first quarter, meaning they owed more on their mortgages than their homes were worth.

That's because home prices continue to go down. Zillow chief economist Stan Humphries says home prices fell an average three percent in the first three months of the year and will drop an estimated nine percent for the year. The reason? Because foreclosures are expected to continue, flooding the market with cheap homes that go begging, because fewer people can qualify for a mortgage.