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It’s demand, not supply

The housing market has definitely improved during the past couple of years, yet Federal Reserve data indicate mortgage loans are still rather weak. North Carolina State University economist Mike Walden examples the reasons.

“This is a very interesting question. Data actually indicate that banks have increased their willingness to make loans very, very substantially over the last couple of years – in fact, across all classes of loans, meaning across all risk levels.

“So what’s the reason why we have not seen a surge in mortgage lending? It appears to be that simply people aren’t coming into the door of the banks and wanting to take out loans. Loan demands – that is, applications for loans – has recovered from the low points of the recession but certainly not recovered to a great degree.

Several reasons for this: weak income growth, the over-hang of concerns about home value depreciation, and the different preferences potentially of young households – many of them are wanting to rent, to live in the big cities, et cetera. Now the big question for the financial sector is will these factors change? Will we eventually see a return of mortgage lending? That has yet to be determined.”