Easier Loans: Haven't We Seen This Movie Before?
Here are words that would warm the cockles of any financial reporter's heart: "It's easier to get a loan these days for a new home or new car than it's been in five years."
I mean, the financial crisis may have been hell on the rest of y'all, but for business journalists, it was the Full Employment for Reporters Program.
OK, so maybe we're not headed into "Financial Crisis II: The Legend Returns." But given all the damage done by loose loan standards, I think this is worth some heavy eyebrow-knitting.
It's also worth thinking about the secondary effects.
The obvious one is on house prices. As the U.S. housing market has slowly inched toward recovery (with a bit of a rocket boost in some areas), there's been one fly in the ointment: interest rates. Right now, they're near rock-bottom. What happens to home prices when interest rates finally, inevitably, start to rise? Any asset that is financed largely on credit is bound to have a little setback when the price of credit goes up.
On the other hand, right now credit has another "price": credit standards for loan issuance. If you can get a mortgage, credit is very, very cheap right now. But only people with very good credit scores can get loans at the moment. For the rest of the market, the price of credit is effectively infinite.
As those less-than-perfect buyers come back into the market, they'll increase demand somewhat. This may be enough to offset the downward pressure on prices from rising interest rates -- especially if higher interest rates make banks more willing to lend to those less-than-perfect prospects. After all, as real interest rates rise, there's more room in your profit margin to lose a few defaults.
For a while now, I've been watching my local housing market the way I watch a horror movie: with only one eye open, ready to shut them both tight when the mayhem starts. But if loosening credit standards go along with rising interest rates, we may have a few more reels before things get gory.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)
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