Larger loans demand greater attention to risk management

Average Home Size Is Growing

This blog recently looked at some evidence that the rest of 2014 will see a more accommodating housing market, with an expanding inventory of for-sale properties drawing in buyers who were previously unable to make a purchase. At the same time, rising prices are creating a risk management challenge for lenders, who are being asked to process applications for larger loans as real estate becomes more costly.

Data from the National Association of Realtors shows that in the market for existing homes, sales of inexpensive properties have been falling, while sales of high-end residencies are increasing. Meanwhile, the National Association of Home Builders (NAHB) has called attention to an increase in the average price of newly built homes. Last year, new houses were reportedly listed at an average price of $318,000, up more than 28 percent from $248,000 in 2009.

Citing data from the U.S. Census Bureau, the NAHB highlighted several factors that are driving up housing prices, with the most prominent being an increase in the size of new homes. The average size of a house built in 2013 was 2,679 square feet — an increase of more than 10 percent over 2009. Since the mid 1970s, when the Census Bureau began tracking this statistic, the average size of new residential construction has grown by nearly 50 percent.

Contemporary buyers are also apparently looking for more features when they evaluate houses. The NAHB noted that almost half of all newly built houses had at least four bathrooms in 2013, up from 34 percent from 2009. More than 20 percent of new homes had a garage capable of accommodating at least three cars and 35 percent had three or more full bathrooms, up from 16 percent and 23 percent, respectively, in 2010.

These patterns are being mirrored by a trend in mortgage applications, according to CNBC. The average size of loans being sought by applicants looking to purchase a home has reportedly reached a new peak — $280,500. Prices are rising even faster in certain markets seen as highly desirable, such as New York, Los Angeles and other major cities.

While a recovering economy and stabilizing job market may give buyers the confidence to pursue more expensive homes, lenders need to be careful in this environment. As financial institutions process more applications for loans to purchase high-value homes, they will need robust risk management solutions to ensure that credit is only extended to borrowers who can reasonably be expected to pay back their debts.

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