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Tight Mortgage Credit Isn't the Real Problem

No wonder most Americans struggle to make a 20% down payment. They cannot save that kind of money on stagnant wages. Without credit, the dream of homeownership will be elusive.

But the answer to unaffordable housing isn't more shaky home loans, any more than the answer to the rising cost of college education is more student debt.

College costs have been soaring and enrollments have increased as higher education promises better job prospects and incomes. Federal loans have helped students go to college in increasing numbers. But students have struggled to find jobs that would help them pay back their loans, saddling them with inescapable debt.

In housing, "we are encouraging people to buy an asset that, when rates go back to 6%, to 8%, will look a bit overpriced" relative to incomes, Zillow's Humphries told the Wall Street Journal.

Underemployment and stagnating incomes are structural problems with the U.S. economy that were for a long time masked by easy credit. Access to credit enabled borrowers to spend more even though their incomes weren't growing, one of the many reasons that sparked the financial crisis.

Banks are right to proceed with caution when it comes to extending home loans under current economic conditions.

Yes, there is an argument to be made for looking at borrowers on a case-by-case basis rather than freezing out all borrowers who do not have a credit score of 700 or more.

But the threat of litigation and the increased cost of servicing delinquent loans has made banks wary of lending to those with a spotty history.

By pressuring banks to do so, the government is just sending banks mixed signals. Regulators view mortgage lending as more risky. New Basel III Capital standards for instance require banks to hold more capital when they make loans with low down payments.

Unless banks can see sustained job growth accompanied by higher incomes, they are unlikely to loosen their credit standards.

Right now, it appears that the housing market is being driven higher by cash-rich investors and buyers.

Maybe prices will rise long enough to create a self-sustaining recovery in housing, where higher home prices drive higher construction activity, leading to more jobs and stronger incomes. Housing has, historically, had a multiplier effect on the economy.

But the housing boom needs to be on the back of real growth in other sectors of the economy. Open the credit spigot too early and we risk another bubble.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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