empty pockets

There’s no doubt that real estate sales would be higher if more people qualified for financing. So why is it that more than a quarter of all mortgage applications fail, homeownership levels are at lows last seen in 1965, and potential first-time buyers are shying away from real estate ownership?

One alleged culprit is the tightening credit box, the idea that lenders have become remarkably picky and now exclude applicants who used to easily pass financial muster. Using data from the Mortgage Bankers Association, Laurie Goodman with the Urban Institute says that a typical underwriter now processes 34 loan applications per month—down from 179 per month in 2002.

So sure, chalk up some of that non-buying to tougher credit standards.

But another issue, one which doesn’t seem to get much attention, is that we live in the tapped-out era, a time when large numbers of people don’t buy homes for a very simple reason: They have credit but they don’t have cash.

The truth is that credit scores have been remarkably consistent for the past decade. According to Fair Isaac, the average credit score in 2005 was 688, a figure which rose just one percent to 695 ten years later.

The problem is not that borrowers have worse credit than in the past. It’s that lenders are seeing less and less in the way of savings, and that’s a cause for discomfort. The national savings rate, which reached 17 percent in 1975, has now declined to just 5.5 percent this past summer.

The Saver-less Society

Mortgage programs do not formally require cash reserves for single-family home buyers, but the reality is that such a standard is unnecessary. Lenders can easily calculate cash savings from bank accounts and other sources, and in many cases they may be discomforted by what they see.

It turns out that most of us are poor savers. According to GoBankingRates.com, two-thirds of us—69 percent—have socked away less than $1,000. In fact, if you’ve got $500 or $1,000 set aside, you’re doing a lot better than about a third of the population, the 34 percent who have no savings.

Another pressure point is more subtle: The burden is on the lender if something goes wrong with a borrower who lacks reserves. For example, the Dept. of Veteran Affairs (VA) says:

“VA does not require the applicant to have additional cash to cover a certain number of mortgage payments, unplanned expenses, or other contingencies… However, the applicant’s ability to accumulate liquid assets and the current availability of liquid assets for unplanned expenses should be considered in the overall credit analysis.”

If you’re a risk-averse lender—the only kind—what would you do?

The Dollar Shortage

Millions of people across the country do not have $400 in cash. How do we know? That’s the size of the typical payday loan, a form of financing where interest rates can top 500 percent. If potential buyers don’t have a few hundred dollars stashed away for emergencies, how can they pay for closing costs? Or a moving van, or a broken water heater? Why bother with a mortgage application that will surely fail?

Consider that one of biggest and most visible cash-draining costs is rent. Whatever cash potential buyers might have is too often vacuumed up by rent costs. Add in car payments and student loan debt, and what remains for millions of households is little or nothing in savings.

“Over the last twenty years, the percentage of Americans dedicating at least half of their income to housing has risen from 42 percent to 52 percent,” said David H. Stevens, president and CEO of the Mortgage Bankers Association. “Over a million families dedicate over 70 percent of their income to pay rent and keep the lights on.”

The result is a new normal, the reason why first-time buyers represent only 33 percent or so of the housing market, a significant drop from the historic 40 percent benchmark. That missing seven percent likely represents more than 400,000 lost home sales this year—a big number by any standard.

Peter Miller freelance writer at Ten-XPeter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.