The American Dream Revised

The effects of coronavirus have already led to sweeping changes in American behavior: close-quartered offices once the home to the 9-5 seem a distant relic, brick-and-mortar retailers stare down their imminent demise as the acceleration toward e-commerce shifts into hyperdrive, restaurants shutter their doors for good as today’s socially-distant reality ravages their socially-dependent business models, and now the dream of homeownership is slowly dissolving as American households face tightening lending restrictions and narrowing budget constraints.

The Mortgage Credit Availability Index, the mortgage industry’s standard measure for the supply of credit to households seeking home loans, fell over 16 percent in March and another 12 percent in April as the economy weakened and uncertainty in the job market amplified. The availability of mortgage credit is now at its lowest level since 2015 and appears primed to plummet further. Large lenders like JPMorgan Chase and Wells Fargo have already toughened their borrower standards. JPMorgan increased its standards to include a minimum credit score of 700 and a 20% down payment on new homes while Wells Fargo increased its minimum credit score to 680 for government loans it purchases from smaller banks. Increased borrowing standards could lead to a drastic decline in the number of mortgage originations.

At year-end 2019, approximately 25% of new homebuyers had a credit score below 700. If JPMorgan’s new standards were applied across all mortgage lenders, an estimated 1.5 million borrowers would fall out of the market. If this story sounds familiar, look no further than the last recession. In the midst of the Great Financial Crisis, mortgage lenders clamped down on borrowing standards resulting in the precipitous drop in the American homeownership rate from the 69% high in 2005 to 65% today.

Many of the potential first-time homebuyers burdened by tighter borrowing standards imposed by banks buckling from the financial crisis instead chose to rent. Since the Great Financial Crisis, the number of American renters has increased by an estimated 19 million and continues to rise. While the decision to rent has been a choice for some, the economic effects of the pandemic will greatly increase the number that rent out of necessity. With borrowing standards climbing and households facing new financial pressures, the dream of homeownership will remain just that for millions of Americans. There is nothing wrong about renting instead of purchasing if that means having a better quality of life and living under better financial means to secure a better future.