New home sales in the United States are on their way down, plunging in March. Additionally, new home prices also dropped rather dramatically last month. Bloomberg reports on new home sales:

Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades.

While spring usually signals one of the busiest home buying seasons of the year, this year things are different. Instead, buyers are wary of rising mortgage rates and falling home prices. Although, to be fair, mortgage rates aren’t that bad yet, and lower home prices could mean a better deal for home buyers who are planning on staying in their homes long enough for the cycle to play out.

But there are other forces at work as well.

Tightened lending standards on home mortgage loans

As subprime writedowns continue to plague mortgage lenders, and foreclosures continue to threaten, lending standards continue to tighten. Someone who could have qualified for a home a year ago may not qualify today. It is harder to get home mortgage loans now. Mortgage lenders are tightening lending standards in two main areas:

1. Credit score. You need to have a higher credit score to qualify. For some mortgage lenders, “fair” credit is just not good enough. And for most, forget about bad credit mortgage loans. In many cases, a credit score above 700 — or even higher — is expected by mortgage lenders.
2. Income verification. No more fudging the numbers a bit to make your income look a little higher than it is. And mortgage lenders are requiring stricter income verification methods. As well as eschewing “creative financing” methods (like ARMs) to help lower your initial payments. Many mortgage lenders aren’t giving out home mortgage loans that borrowers can’t afford.

These tighter lending standards are probably better in the long run — for the economy and for home buyers. But at the same time, they are creating short-term problems. Many who are ready to sell can’t because they can’t find buyers who are qualified.

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subprime writedowns, mortgage lenders, lending standards

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