The tight credit policy of a country’s central bank often means that borrowing regulations are strict and liquidity in the system is not enough to allow free credit flow. A tight credit policy means that banks are overtly cautious on lending.
The massive fallout of sub-prime crisis and the increase in job losses resulted in banks being extremely careful with their lending habit. They only allow credit to those who have a true good credit score and very low debt to income ratio. As a result, the real estate market suffered tremendous fallout in the US, both on the housing and commercial side. Many developers are considering the wait and watch attitude with the hope that bankers would change their policy soon. Some of their projects are even left unfinished. This has also reduced supplies of new homes and resulted in home prices stabilization that has consistently been on the decline the past few months.
Banks approved home loans only to people with good credit worth as reflected by their credit score. The banks are compelled to these strict measures due to the various steps by the central bank in the aftermath of the collapse of several big financial industry companies and the housing industry.
The central bank’s inability to resume its easy credit and let banks lend more freely is more likely to result a longer time for the real estate market to come out of slumber. An easy way to find out if banks are following easy or a tight credit policy is to check out the numbers related amount lent to households and businesses, which is published regularly by FED. A significant portion of the banks’ lending goes to the real estate sector and the development of the housing sector or the real estate sector are greatly determined by the banks’ lending practices which is in turn determined by the monetary policy of the Central bank.
It is likely that the tight credit followed by banks will stay up to the second half of the year 2010. Many of the economists believe that the financial system is not robust enough to allow an easy credit flow to the real estate market. In the meantime, banks have their duty in determining the exact amount of funds to be made available to housing sector. No doubt, the real estate market has to withstand the worst of a tight policy followed by banks. The increasing number of foreclosures has added insult to the real estate industry.
The impact of tight credit first affected the residential side, since only very few homebuyers are extended credit to purchase a home; it is now having a huge impact on the commercial real estate. It is noticeable that commercial buildings for offices, warehouses, stores are now experiencing higher vacancy rates. The most declines are in areas with high residential foreclosure rates.
However, most economic analysts believe that a tighter credit policy is much better than a chaotic situation, as seen in the real estate sector decline in the very recent years.
Find out more about San Diego homes at San Diego Real Estate Articles and a cozy small town feel at Maryland Community Guide.
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