Some home builders are heralding federal regulators’ move this week to ease mortgage-qualification standards as a key to reviving the entry-level market but at least one is panning it as a return to dangerous lending.
The Federal Housing Finance Agency indicated this week it will expand mortgage availability with changes such as allowing borrowers to make a down payment of 3% of a loan’s value rather than the typical 20% for a high-quality mortgage.
On Thursday, two national builders reporting quarterly results touted the change as key to bringing first-time buyers back into the market. First-time buyers accounted for an average of 29% of new home sales from 2001 to 2011, according to the National Association of Home Builders. But this year that figure has dropped to an estimated 16% , because of tepid job and wage growth, mounting student debt and tight lending standards.
“I don’t think anybody is a proponent for going back to what happened in 2006 or 2007 at all, but a little common sense goes a long way,” said Larry Nicholson, chief executive of builder Ryland Group Inc., in a conference call with investors Thursday, adding, “I do think it helps the entry-level buyer with the 97% (loan-to-value) program. I think that will get some people off the fence.”
Richard Dugas, CEO of builder PulteGroup Inc., called the proposed changes “a positive statement” during his quarterly conference call with investors on Thursday. “Over time, as some of these ideas get put into practice, it certainly has the potential to affect activity, particularly for the entry-level category,” Mr. Dugas said.
But a different view was expressed Wednesday by Robert Toll, founder and executive chairman of luxury home builder Toll Brothers Inc., during remarks at a Urban Land Institute conferencein New York. He called the proposed loosening of credit standards “a really dumb-ass idea.”
“Yeah, we have a slow recovery, but it appears to be going to continue,” Mr. Toll said, adding, “Why do we want to go do what got us into this problem in the first place? … Three percent down doesn’t make any sense.”
Mr. Toll concluded that lenders have required a 20% down payment on top-rated mortgages for decades “and we had a hell of a housing program.”
Mr. Toll has a little less at risk than do other homebuilders. His company caters to affluent buyers, selling homes at an average price of $717,000. Pulte and Ryland, by contrast, serve more entry-level buyers than Toll, though they sell to others as well.
Quarterly results released by Pulte and Ryland on Thursday reflected a new-home market that remains stuck between neutral and slow growth. Pulte reported inking 3,779 sales contracts in its third quarter, flat from the year-ago period when analysts expected a gain of 5%. Ryland posted a 7.2% increase in orders to 1,707 when analysts expected a double-digit gain.
Ryland’s average selling price registered $331,000, up 11.1% from a year earlier after gains in the high teen percentages earlier in 2014, according to Raymond James & Associates analyst Buck Horne.
Toll, for its part, reported in September a 6% decline in orders in its latest quarter, which ended July 31.