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20% down to buy a house
A Washington Post article reprinted in yesterday’s Globe reported that the Obama administration and federal regulators are proposing that federally backed mortgages in the future only be granted to borrowers who are able to make a down payment of 20% of the purchase price. With the median US house price of $170,000, that means the new buyer would need $34,000 in cash to contribute to the purchase plus more for the closing costs. Given the economic realities of today, few young people will be able to afford to purchase a home until they are no longer very young. 20% may have been the norm many years ago, but recently down payments in the 5% range have been the norm. While low down payments undoubtedly played their role in our current real estate and financial problems other issues – reckless lending, no underwriting, a lack of regulation – all had much more to do with it and little has been done to remedy those flaws in the system.
Yeah – this whole thing seems to be designed to kick people when they are down. Those of us in “starter homes” that lost over 20% of their value in the past few years are scrambling to save to get out. That money is going to be in lower-yield investments because we can’t afford to lose it and it needs to stay liquid. Meanwhile, the higher the downpayment on a new place becomes, that’s even more money we are keeping out of the economy while saving. Add in the job uncertainties we’re all facing, and people are hoarding cash.
Meanwhile, the higher barrier to entry for everyone else seems like it can only depress home values further, making it even worse for those of us trying to move. We can’t walk, because we need our credit to be good so we can buy again in a short window. Then again, I recently posted on my blog about how I’d prefer renting became more popular. Maybe I should take my own advice, walk, and then just rent. Much easier.
Moral of the story: overbuy, and the government will help you out on everyone else’s dime. Do the right thing; you’re on your own and you get screwed over and over for years.
“Reckless lending”
Doesn’t giving mortgages to those who can’t save enough money throught the years to put down 20% qualify as reckless lending? There was a reason that was the norm. Because its sound fiscal and lending policy. Not everyone should own a home, especially if their entire life is spent on credit. Go back to the old days and old lending habits, and not only will you keep home prices reasonable, but you also might affect spending habits and get people out of this debt-credit mentality that has jeopardized our individual and national financial well being.
Corey, I truly am sorry for those of you who got caught up on the wrong end of the housing bubble. I hope things work out for you eventually. I won’t speak for your specific circumstance, as I’m not aware of the details, but there are a lot of us who practiced traditional financial discipline and didn’t jump into the housing market when it was so obviously bloated. As a result, I was rewarded with what some have termed a “steal”. I prefer to term it a good bargain, as I got a nice house for a reasonable price. I don’t expect it to reach its peak market price ever again, nor do I want it to. It’s a house, not an investment.
Righty – you’re correct, but what happened here with the market is fairly unprecedented. The “conventional wisdom” has been buy a house if and when you can because it’s 1) a great tax break, 2) the easiest way for those of us in the middle class to have any marketable assets whatsoever via home equity, and 3) what Americans do. This has all been turned on its head and while in many ways I’m glad sanity has returned, at the same time, a lot of people got hosed here. Sure, we should’ve known better, but we were just playing by the rules of the game as they existed mid-decade. And, to Dick’s point, I was one of the “very young” that are going to be walled out of the market now. However, since I made it into the market before the crash, I’m worse than walled out, I’m stuck.
So, in my particular case, I was just out of school and needed a place to live. Everybody said buy, buy, buy. I did the math out on the old standby 28%/36% ratios, went pretty conservative on that, applied for a zero-down fixed-rate loan which of course comes with PMI (as I needed what little free cash I had for things like furnishings but didn’t trust the adjustable rate mortgages), got it, and moved in just in time for the crash. My plan, like many people’s, was to never end up paying off the loan because you get out in 5 years on a 30-year mortgage at a small profit (which affords you a downpayment on a new place). You’re paying almost exclusively interest at the beginning of these mortgages, so you get a high tax deduction, and you don’t get even close to paying the 300% of home price that holding the loan for its entire life would imply. All that needs to happen for this to work out is that home values improve a bit over inflation, and that’s been pretty reliable over the years.
So now, I’m stuck with a 1 bedroom condo that I can’t legally have more than two people in. If I end up married and thinking about children before I can get out from under this thing, I’m totally screwed. Add in the higher barrier to entry for the market, and bottom-end dwellings like mine are continuing to fall in value. 30%…40%… I can’t refinance it’s so underwater, and the current mortgage payment is way more than I could rent it out for even if I could theoretically afford the risk of renting it out and being without rental income for any appreciable period of time. So, I’m aggressively saving at a time when we’re all being asked to spend because I need to keep my options open as much as possible.
I wish during the process of researching what types of mortgages to get, how much house I could afford, etc that anyone had mentioned the term “bloated market,” because certainly nobody I talked to said anything about homes being just another commodity that booms and busts. Nobody said anything about the rise in home prices not being tied to any actual value but simply more and more exotic financing. A lot of people just said they aren’t making any more land, so what can home values do but go up? It’s *amazing* how much financial voodoo people that thought they were below financial voodoo we’ve had to learn after the fact. If there’s a silver lining here, it’s that a lot of people who were only so interested in high finance learnt a lot more about it. It’s certainly caused some bitterness too because I know the people I bought it from were sitting on hundreds of thousands of dollars, bought a slew of condos, and sold them to a bunch of inexperienced buyers just in the nick of time for 30%+ profits. They’re fine. People who spent far more than I and make far less got their loans rewritten by the government. I could’ve bought more house, pulled that crap, and been fine.
Nearly a century ago, Upton Sinclair wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” which I think perfectly sums up the real estate boom. Everyone involved was making a ton of money so there was no incentive to acknowledge what was crystal clear to some of us. When you saw 3-families that could easily serve as the crack house in The Fighter selling for $350K or more, you knew the market had gone crazy.
The other thing that was operating was that with wages stagnant for more than a decade, the only way for corporate America to get folks to spend more money was to get them to go into debt. Long-time homeowners who, if they had sat tight with their original mortgages would have paid them off by now, used the rising equity of their homes as ATM machines to finance a standard of living that their income would not support. The cut-off of this flow of consumer credit is one of the main reasons our economy remains stagnant. Unlike Goldman Sachs, et al, the average American gets no government bailout so we’ll be stuck with this negative equity for a while.
Finally, as Righty says, a house is not an investment; it’s a place to live. The sooner everyone treats it that way, the better off we will all be.
In other words Corey, you treated your house as I treat the stock market. We both used our hard earned money as a way to make easy money. You gambeld and lost big time in the housing market and I’ve gambled and lost big time in the stock market. Yet you (and by “you” I mean the “people” who overpayed and gambled on the housing market) would now like the government to bail you out so you can continue to make money in the future and not be stuck in your unfortunate circumstance.
Sorry to sound cold, but that’s not fair. I don’t hear anybody trying to bail me out of my losses on the stock market. I gambled and lost, as did you. I don’t expect you or anyone else to pay for my bad decisions. Forgive me if I don’t want to pay for yours.
Sadly though, that has become the American Way.
BTW, I wholeheartedly agree with Dick’s take on why the economy isn’t recovering as quickly as it has in the past. You hit the nail on the head.
The government should have never bailed out Goldman Sachs et al. Should have let them die a slow death, just like the individual homeowners are now doing. The lessons of 1929 lasted for over 50-years before they were forgotten and greed and reckless financial gambling took over again. We shouldn’t be so quick to let those lessons get lost again.
No Righty, I’m more than willing to accept my lot because I know it’s my own fault. I’m not happy that I screwed up here, but it’s different than the stock market in the fact that Americans have always viewed stocks as a gamble – homes have not traditionally been looked at that way. In fact, the government has actively worked to get people into homes, so yeah, I do feel a bit fleeced.
What does bother me is that I don’t like the preferential treatment that certain homebuyers got, those who screwed up even more than I (I made a bad investment, they went in over their head), in the name of “preventing a flooding of the market with foreclosures.” I certainly don’t like the preferential treatment that the banks that profited off of this whole thing got. Plus, as I said, it’s worse than that. The government, by introducing incentives into the tax code that become the largest deduction the average middle-class American will ever see, fed into this crisis. Add in their pushes for subprime loans, and you know what they say about the road to hell.
The problem now is that changing the rules after the fact to something far saner is only going to sink those of us who are trapped deeper still.