Secret #33 – Easier Mortgages Easily Turn Into Higher House Prices

This has been known for a long time, but today’s real estate establishment is in complete denial that easier mortgages easily turn into higher house prices… or it completely hides the truth.

"the liberalization of terms easily becomes capitalized in higher prices….[t]he data indicate that from 1938 through 1941 borrowers in the same income groups paid higher prices when more liberal credit was available, borrowed larger amounts in proportion to their incomes, and incurred debt service burdens that absorbed more of their expected incomes" (Fisher 1951 via Pinto 2015).

And that was at a time when foreclosures were extremely low.

Because the supply of houses is essentially fixed in the short run, easier mortgage terms can increase demand and prices enough that houses are less affordable than before the mortgage terms were liberalized. 

This doesn’t happen with other goods because the total available supply of other goods increases far faster than the total available supply of houses. The supply of gold worldwide, for example, increases almost twice as fast as the supply of single-family houses in the U.S. 

Housing supply increases far more slowly than the demand caused by easier mortgage terms. With houses, it’s easy for demand to outrun supply and increase prices.

See a more detailed discussion from Ed Pinto (2015) of AEI here on the history of how lower FHA lending standards were first monetized into higher home prices (and later caused higher foreclosure rates).