patrick.net

...I guess the radio silence is perhaps indicative of the wide appeal these loans have?

WOW.

So I take it that NOBODY puts 20% down anymore???

Wha--?

Why would you? As long as PMI isn't too terrible, putting 20% down seems like a waste of money when interest rates are below 6%. You could put that money into investments that will wind up paying the entire monthly mortgage payment in the final 10 years of the loan. If prices tank too much, you can always walk away and keep everything you've been earning from your alternative investments, whereas if you put that into a down payment you've just lost your ass.

If interest rates go over 8% or so, we'll probably see significantly higher down payments becoming normal.

20% is simply out of reach for most buyers in highly inflated areas, so even if it did make more financial sense to put 20% down, I don't see it happening. 20% down in LA or the bay area means $100-150k, which is money most people simply do not have.

Thanks for responding, Kevin. Now I'm going to shoot you down.

RE: 20%....if a buyer doesn't have it, (or are unwilling to be patient and make the sacrifices necessary to save it) then it begs the question - are they really qualified to buy houses in that price range? The short answer is no. As in, pfffft!! NO!!! The longer answer is, maybe the homes are overpriced for that area/demographic to begin with and you should let them depreciate if you can't afford at least a 20% stake in them, rather than buy something outside of your means as a self stroke. You know...act your wage! Would that not benefit everyone?

Having equity in your home seems like a good thing, especially if the market in your area has leveled off -- which it would, if there weren't all of these subprimey FHA loans and Uncle Sam grub stakes out there to keep things static. You don't want to be a debt slave forever, right? Also, if interest rates go up, then prices go down. Wait for them to go up, save while you wait, and you'll not only potentially have less property taxes, but you could probably pull off a 15 year mortgage and, again, not be in hock forever. This makes sense to me, especially since prices on homes are not going to appreciate the way they did during the funny paper maelstrom. As far as walking away goes...I guess it's the moral relativity that bugs me the most about that mindset. Live for today, blah, blah, blah. I hate that. It's a big component in what fucked everything up.

Also...if you're putting jack shit down, (and the folks I know are STRUGGLING to get the 3% together in escrow) doesn't that mean your monthly payment will be enormous? And potentially put you a hair's width from disaster, especially in this economy?

I'm sorry, but it just smacks of the same old Smash N Grab mentality that got use into this mire. Thanks for your take, though. I mostly wanted a sampling of the mindset out there.

Austinhousingbubble says

RE: 20%….if a buyer doesn’t have it, (or are unwilling to be patient and make the sacrifices necessary to save it) then it begs the question - are they really qualified to buy houses in that price range? The short answer is no. As in, pfffft!! NO!!! The longer answer is, maybe the homes are overpriced for that area/demographic to begin with and you should let them depreciate if you can’t afford at least a 20% stake in them, rather than buy something outside of your means as a self stroke. You know…act your wage! Would that not benefit everyone?

Your argument makes no sense. Why do you expect people to act irrationally? If the bank doesn't think the person is a risk, why should the person make a bad financial decision? I have just about enough to put 20% down on the places I'm looking at, but I'm not going to -- that money is earning 8% where it is. It would yield virtually no benefit if I spent it on the down payment instead.

It would be good for society, as a whole, to have 20% down payment requirements -- absolutely. But you'd be a financial moron to put 20% down when you only had to put 3% down and interest rates are as low as they are. That's voluntarily throwing money away for no good reason.

Austinhousingbubble says

You don’t want to be a debt slave forever, right?

Being a "debt slave" implies really poor financial planning. Not all debt is "bad", especially when that debt is very, very cheap. If someone offers you a million dollars at 0% interest, you're a fool for not taking it. You can turn around and put that money into a savings account and make money from nothing. Debt goes bad when the cost of servicing it outweighs the benefits of taking it in the first place.

Also, never under estimate the power of inflation. Taking out lots of debt just before a period of high inflation would be a very, very smart move.

Austinhousingbubble says

lso, if interest rates go up, then prices go down.

That really has nothing to do with how much of a down payment you would make. I agree that prices will go down as interest rates go up, but if somebody is buying *right now* anyway, putting 20% down is a waste of money.

Austinhousingbubble says

As far as walking away goes…I guess it’s the moral relativity that bugs me the most about that mindset. Live for today, blah, blah, blah. I hate that. It’s a big component in what fucked everything up.

So try to get the laws and standards changed. Asking for individuals to voluntarily make poor financial decisions is a waste of energy.

Austinhousingbubble says

Also…if you’re putting jack shit down, (and the folks I know are STRUGGLING to get the 3% together in escrow) doesn’t that mean your monthly payment will be enormous?

Not when interest rates are this low. Putting 20% down on a $500k purchase only saves you $500 a month, or $6000 a year. If you can't earn $6000 a year on that $100k in other investments, you need a better financial advisor. PMI and interest deductions complicate things a bit more, but on the balance you should be able to do better with that $100k than whatever it's going to save you in house payments.

Austinhousingbubble says

And potentially put you a hair’s width from disaster, especially in this economy?

Only if you do something stupid like buying a house that you can't afford the payments on, but if you're making a financial decision like that then you aren't likely in a position to make cost/benefit analysis decisions about how your down payment money would be best spent anyway.

Austinhousingbubble says

RE: 20%….if a buyer doesn’t have it, (or are unwilling to be patient and make the sacrifices necessary to save it) then it begs the question - are they really qualified to buy houses in that price range? The short answer is no. As in, pfffft!! NO!!! The longer answer is, maybe the homes are overpriced for that area/demographic to begin with and you should let them depreciate if you can’t afford at least a 20% stake in them, rather than buy something outside of your means as a self stroke. You know…act your wage! Would that not benefit everyone?

Your argument makes no sense. Why do you expect people to act irrationally? If the bank doesn't think the person is a risk, why should the person make a bad financial decision? I have just about enough to put 20% down on the places I'm looking at, but I'm not going to -- that money is earning 8% where it is. It would yield virtually no benefit if I spent it on the down payment instead.

It would be good for society, as a whole, to have 20% down payment requirements -- absolutely. But you'd be a financial moron to put 20% down when you only had to put 3% down and interest rates are as low as they are. That's voluntarily throwing money away for no good reason.

Austinhousingbubble says

You don’t want to be a debt slave forever, right?

Being a "debt slave" implies really poor financial planning. Not all debt is "bad", especially when that debt is very, very cheap. If someone offers you a million dollars at 0% interest, you're a fool for not taking it. You can turn around and put that money into a savings account and make money from nothing. Debt goes bad when the cost of servicing it outweighs the benefits of taking it in the first place.

Also, never under estimate the power of inflation. Taking out lots of debt just before a period of high inflation would be a very, very smart move.

Austinhousingbubble says

lso, if interest rates go up, then prices go down.

That really has nothing to do with how much of a down payment you would make. I agree that prices will go down as interest rates go up, but if somebody is buying *right now* anyway, putting 20% down is a waste of money.

Austinhousingbubble says

As far as walking away goes…I guess it’s the moral relativity that bugs me the most about that mindset. Live for today, blah, blah, blah. I hate that. It’s a big component in what fucked everything up.

So try to get the laws and standards changed. Asking for individuals to voluntarily make poor financial decisions is a waste of energy.

Austinhousingbubble says

Also…if you’re putting jack shit down, (and the folks I know are STRUGGLING to get the 3% together in escrow) doesn’t that mean your monthly payment will be enormous?

Not when interest rates are this low. Putting 20% down on a $500k purchase only saves you $500 a month, or $6000 a year. If you can't earn $6000 a year on that $100k in other investments, you need a better financial advisor. PMI and interest deductions complicate things a bit more, but on the balance you should be able to do better with that $100k than whatever it's going to save you in house payments.

Austinhousingbubble says

And potentially put you a hair’s width from disaster, especially in this economy?

Only if you do something stupid like buying a house that you can't afford the payments on, but if you're making a financial decision like that then you aren't likely in a position to make cost/benefit analysis decisions about how your down payment money would be best spent anyway.

Your argument makes no sense.

But especially because you disagree with it, I suppose.

Why do you expect people to act irrationally?

Just for starters, irrationality is an innate characteristic of the human ecology. Never mind Freud, history bears this out. How many examples would you like me to bore you with? I'm not even clear if this was a real question.

If the bank doesn’t think the person is a risk, why should the person make a bad financial decision?

Well, Banks are interesting. They've been known to develop really clever ways of repackaging risky loans. Derivatives never really went away or anything. Check it out: http://www.bloomberg.com/apps/news?pid=20601109&sid=aeTzfvEedKpQ
p>

I have just about enough to put 20% down on the places I’m looking at, but I’m not going to — that money is earning 8% where it is. It would yield virtually no benefit if I spent it on the down payment instead. It would be good for society, as a whole, to have 20% down payment requirements — absolutely.

That you afford this fact one line is maybe indicative of where we part ways on this matter; I'm not talking about houses as investment opportunities here.

But you’d be a financial moron to put 20% down when you only had to put 3% down and interest rates are as low as they are. That’s voluntarily throwing money away for no good reason.

I am honestly trying to see your point. How is it throwing good money away? To pay off as large a percentage in your biggest investment/liability as you can in order to be free and clear of interest payments as soon as possible is financially moronic? You're going to be paying it one way or another, unless you think you're going to turn around and sell it for a profit in five years, which you won't. You'd be able to save more effectively if you were able to pay the whole thing off early, correct? Say, a 15 year mortgage? Your saving power would increase exponentially at that point, and you'd still be in your prime earning years, as well. And you've got a place all your own to sit and count your filthy lucre!
While were at it, was it also financially moronic to seek a conventional loan with 20% down during the bubble years -- other than the fact that you are likely underwater now, which is maybe besides the point, if you can still afford your payment. Certianly it wasn't more savvy to go the ARM route?

Austinhousingbubble says
You don’t want to be a debt slave forever, right?
Being a “debt slave” implies really poor financial planning. Not all debt is “bad”, especially when that debt is very, very cheap. If someone offers you a million dollars at 0% interest, you’re a fool for not taking it.

I understand the fundamentals of debt in this context, but it is pretty far removed from our context here. I am merely weighing the benefits in swiftly defraying one your all time biggest expenses in life as opposed to nickel and diming yourself over the long term.

Also, never under estimate the power of inflation. Taking out lots of debt just before a period of high inflation would be a very, very smart move.

Yes, but this is not the circumstances we presently enjoy. G. Soros had it right, when he recently stated that the real thing to fear is fear of hyperinflation. Deflation will more likely be the order of the day for many years to come, especially as interest rates go up.

also, if interest rates go up, then prices go down.
That really has nothing to do with how much of a down payment you would make. I agree that prices will go down as interest rates go up, but if somebody is buying *right now* anyway, putting 20% down is a waste of money.

My point was that if you put 20% down on a house (or, God forbid, more) priced at current market value, in, say, 6 months to a year and a half from now, despite higher interest rates, you're 20% goes much further toward the principal balance of the home. Which, not to belabor the matter, seems like a good thing, not only lowering your monthly overhead, but freeing up assets for savings and other investments.

Austinhousingbubble says
As far as walking away goes…I guess it’s the moral relativity that bugs me the most about that mindset. Live for today, blah, blah, blah. I hate that. It’s a big component in what fucked everything up.
Asking for individuals to voluntarily make poor financial decisions is a waste of energy.

Not if the last eight years are any indication.

Austinhousingbubble says
Also…if you’re putting jack shit down, (and the folks I know are STRUGGLING to get the 3% together in escrow) doesn’t that mean your monthly payment will be enormous?
Not when interest rates are this low. Putting 20% down on a $500k purchase only saves you $500 a month, or $6000 a year. If you can’t earn $6000 a year on that $100k in other investments, you need a better financial advisor. PMI and interest deductions complicate things a bit more, but on the balance you should be able to do better with that $100k than whatever it’s going to save you in house payments.

Perhaps.

Who gives a damn about equity??? It's not real. It's a market controlled attribute. Austin, I would suggest you get on the band wagon and take advantage of the market conditions. I would think that a guy like you would be able to leverage himself in this market as to gain the most optimal benefit. Don't waste it away by being irritated by the morons around you that are scooping up the opportunities. Hedge your bets and double down!

-Drew

And overpay for a home in a vastly overinflated market? Where is the pleasure in that?

With 3% down, this give people the opportunity to buy homes they otherwise couldn't afford. Credit is still incredibly cheap and... well, what could possibly go wrong?

I guess I have no room to talk, my ex & I put 5% down on our last house and it was the equity from that that paid my 20% down on this one. But the $50+k that I got out of it was nothing compared ot the $ that we put into it, making it liveable & planting trees & yard.

I do not know were to begin with all of this. I think it is amazing how so people know exactly what is going to happen to the market when 90% of the data they have is subjective and the information that is not is partially incorrect. With that said here is my "opinion" on things.

1. I do not have an issue with the requreiment of 3% down vs 20% down because
a. From an investment standpoint risking 3% is a hell of a lot > then risking 0%. By forcing people to have atleast 3% adds enough risk that most people would not take it without some level of commitment.
b. Unlike 5 years ago, Unless I have can come up 20% down most banks will no longer lend you money for a second home/investment property. This is another strong preventative to repeating lending sins of the past.
c. Although you only need 3% down "Most" banks are not no longer lending to what they would consider high risk people. Ie bad credit, low cash reserves ect... When I bought my place late last year the bank wanted me to show that I had access to atleast 20% (401k, savings ect.) down even though I put down 10%.

IMO I feel that the requirement of 3% is a good step in the right direction. Although a 20% loan maybe a safe one I do not know if going to that extream will do more good than bad.

2. Why is it a bad idea to shop for a house right now? Do you know 100% for sure when the market will be at the bottom and when the best time will by will be? I personally like the idea of jumping in on things after everyone has jumped out. Doing so you have a tendancy to get a better selection and more bargaining power. Yes, the economy sucks, but do you know when it is going to turn arount? Also, can you or any one guarentee that when the economy does start to turn around you will still find the same deals if not better? What about inflation, do you know what will happen because I sure don't

Kevin: "You could put that money into investments that will wind up paying the entire monthly mortgage payment in the final 10 years of the loan."

And this one: "If you can’t earn $6000 a year on that $100k in other investments, you need a better financial advisor."

Finally: "...but I’m not going to — that money is earning 8% where it is."

And where are you investing where you're getting 8-10 percent? (I'm thinking corporate bonds that are largely junk, btw; emerging markets? Nope, they are imploding; Energy: Not there either since all nations are dropping energy usage due to the collapse and oil is going down - possibly to $32/barrel. FNMA et al? Well, I got out of those last month and the rate was about 4-5% return however the risk was too great in this enviro.

Anyway: PLEASE LET US ALL KNOW where we can get 8-10 percent in this market of programmed trading and manipulation. Not even the hedgies are getting those rates of return in this enviro and Madoff was the one who consistently gave 10 percent returns even in down markets. So, I'm wondering who are you with??? Thanks!

One thing: the 3% down will probably stay since politically protected groups benefit from its existence. This in turn benefits the politicians who seek re-election.

It's all bogus, but it keeps voters happy.

Misstrial says

Anyway: PLEASE LET US ALL KNOW where we can get 8-10 percent in this market of programmed trading and manipulation. Not even the hedgies are getting those rates of return in this enviro and Madoff was the one who consistently gave 10 percent returns even in down markets. So, I’m wondering who are you with??? Thanks!

Yes, yes please do! I too would like to know of a nice, safe place to put my emergency money where I can just sit and make 8%+ a year. Guess I must just be an idiot...

Austin Housing Bubble,
You seem to be angry at anyone buying a home with 3% down... I want the market to tank just as much as you, so we can get this housing bottom over with. Kevin has some great if not somewhat exaggerated points about having $100K in the stock market being better than putting that money into a house downpayment.
Most people predict that over the next 5-10 years there will be zero house appreciation. So why in the world would ANY sane person want to put $100K into an asset that isn't appreciating.
Does anyone on here really believe the stock market will be stagnant for the next 10 years? You all seem to believe housing will be.. But I'd be willingly to bet my left nut that in 10 years we will atleast be back to a DOW of 14,000. That's a pretty huge gain on that $100K investment.... If I'm wrong and the market flounders. You'll still have some shining stars in the market that will grow... Good tech stocks like Apple, Google, ect... will not stand still.
So yes, even if Kevin won't earn his 8% returns this year or next year.... in 10 year I'm pretty positive he'll do much better in stocks than in housing.... Housing still has 2 years of downturn and 8 years of stagflation....
Good stocks won't sit idle for 10 years.... Good housing might.

rmm221 says

So why in the world would ANY sane person want to put $100K into an asset that isn’t appreciating.

Because a house to live in is an expense, not an investment. Once a person decides to buy rather than rent, appreciation is not the issue, but how to best allocate funds. This is when the comparison between 3% or 20% can be made. By putting say, $100k down on a house with a 5.75% mortgage, the person is in effect earning 5.75% on his money, plus the savings on PMI. Now if one can earn that 8% that Kevin metioned, the $100k would be better invested than used as a down payment. Still, I'd like to know where one can earn 8%, especially after the "financial advisor" takes his cut.

One comment I must make: Throughout the years, I have heard people with "financial advisors" tell me about thier high returns, as much as 22%. A few of these folks have let me look at the investments. What I have found is that people with "financial advisors" do not know how to calculate ROI. In each case of the investments I examined, I found that the client would have been better off at current Credit Union CD rates, especially after loads, fees, and misc charges are considered.

Kevin: "that money is earning 8% where it is"

Yes, please do tell where I can make my 8%.

Oh, wait.

Austin Housing Bubble,
You seem to be angry at anyone buying a home with 3% down… I want the market to tank just as much as you, so we can get this housing bottom over with. Kevin has some great if not somewhat exaggerated points about having $100K in the stock market being better than putting that money into a house downpayment.

Not angry, really, just bemused. It seems like amnesty is reserved exclusively for the imprudent and the takers anymore. 15 - 20% very recently used to be the norm, and I still maintain for good reason: people had some skin in the game, and walking away was not really so casually tossed about as a realistic option. Now it's 3% grubment loans, and rather than skin, we have a few hairs, at best. Nose hairs, at that. And, of course, with the power of suggestion being what it is, shirking one's debts is becoming less of a stigma. A healthy sense of shame and responsibility seem to have quickly become obsolete. That's too bad.

For the record, I wasn't thinking of putting 100K on a house - those weren't my numbers. I am not out to buy a 500K McMansion. My notion was to get the lion's share of a house (your largest investment) mowed down to a manageable monthly payment, gradually restore the savings used for the down payment with the help of a lower monthly overhead than I would have with a 3% FHA loan, more quickly pay the house off and have even less monthly overhead for investing/saving while still in my prime earning years, especially, if I were to take out a 15 year mortgage. If I bought a home with a 15 yr mtg in say, a year, after the interest rates go up again and prices subsequently slide further, my twenty percent will not only go further toward the principal of that now lower priced house, but I will still enjoy a lower interest rate with a 15 year mortgage.

I thought 20% was going to be the norm again but I'm not seeing that. I've been monitoring the homes that meet my criteria since December. Last night I was updating my Excel document and noticed 4 homes had sold in the past couple months. I looked up the loans. One had a 15% downpayment (not too bad). The other 3 had less than 5% downpayments. The price of these homes ranges from $255K - $285K.

Austin Housing Bubble said: For the record, I wasn’t thinking of putting 100K on a house - those weren’t my numbers. I am not out to buy a 500K McMansion.
****
Understandable... Although L.A... If you want less than a 2 hour one-way commute to work... Relatively safe neighborhood, and decent school district to raise kids.... $500K still only gets you a starter home.. 3x2 under 2000 square feet. I think that number will decrease to around $400K over the next year or two... Atleast that's when I'd be willingly to seriously start shopping... But even if i had $80K to put 20 percent down on a $400K starter home.. I'd prefer keeping that money liquid for now.
I can always just pay down the principle in the future if I want to pay off the home sooner... Why tie up 20 percent into a home during a bad economy... If the government programs don't force you to, why do it? I wouldn't be against the government passing a law that everyone must have 20% down before they purchase a home starting NOW..... Because then the prices of homes would DROP swiftly and dramatically to balance out the fact that no one would be buying.
And my 20% down payment would be far more manageable... But that isn't going to happen... So why tie your hands behind your back financially.. when you can remain LIQUID and juggle your investments and assets in a manner that you are not beholden to fluctuations in the housing market. Yes, stocks are very volatile.. But atleast you can sell stocks with the click of a mouse button... Can't do that when you see housing prices dropping...

Tell that to the folks that lost 40% of their 401K because they "were in it for the long haul" or were told, " Don't touch it, it will come back". There is no "safe" place to invest your money unless you use the bank of stearns and foster.

Why not be angry that the government is making loans with a 3% downpayment?

This makes housing more expensive and your money less valuable.

If you are looking to buy why shouldn't you be angry?

Understandable… Although L.A… If you want less than a 2 hour one-way commute to work… Relatively safe neighborhood, and decent school district to raise kids…. $500K still only gets you a starter home.. 3×2 under 2000 square feet.

I would say that the prices are the problem in that case. Also, starter home is strictly NAR nomenclature, and it has unfortunately really stuck in the consumer mindset. Half a mil...there's just something wrong when the dollar is considered so relative, don't you think?

I can always just pay down the principle in the future if I want to pay off the home sooner…

I see you point, but I know some mortgages have penalties built in for early payments. Also, depending on your age, in the future, you may not have the earning prowess you presently enjoy. Why not defray the lions share now? Nobody can make this not make sense to me.

Why tie up 20 percent into a home during a bad economy.

It's not really tied-up if you can afford it. You bought something. If tying it up is bad, why not rent until the tide comes back in?
If you bought a motorcycle for 7K and had 10K in the bank, and 10K on a credit card with a fixed interest of 6%, what would you do? Put 3% down and use the credit card? How is it *THAT* much different with a house or any other commodity?
It's not a rhetorical question, by the way.

Austinhousingbubble says

Well, Banks are interesting. They’ve been known to develop really clever ways of repackaging risky loans. Derivatives never really went away or anything. Check it out: http://www.bloomberg.com/apps/news?pid=20601109&sid=aeTzfvEedKpQ

So your argument is that, because banks are doing evil and stupid things, you should spend your money poorly out of some misplaced sense of what is "right" or something? Why not take advantage of their evil and stupidity? It's not like there's anything you can do to stop them from making the same mistakes.

Austinhousingbubble says

That you afford this fact one line is maybe indicative of where we part ways on this matter; I’m not talking about houses as investment opportunities here.

I'm not talking about them as investment opportunities either -- 20% down payment requirements would reduce forclosures and keep people who don't have enough money to buy in the first place out of the market. That would be a VERY GOOD THING. However, if the requirement for 20% down isn't there, and interest rates are lower than your returns elsewhere, you're wasting money putting that money into a down payment.

You can almost always put more money into your mortgage at any time. Early payment penalties are pretty rare, and easily avoided by going to a decent direct lender. If the market turns sour and you can't realize returns better than your interest rate any longer, then you sell the stocks or whatever and pay off part of your house.

Austinhousingbubble says

o pay off as large a percentage in your biggest investment/liability as you can in order to be free and clear of interest payments as soon as possible is financially moronic?

It's moronic because the loan is cheaper than what you can earn elsewhere. This is really a simple calculation:

if (amount saved per month by adding to down payment) > (amount made per month from other investments) then
put money into down payment
otherwise
put money into other investment

Austinhousingbubble says

Certianly it wasn’t more savvy to go the ARM route?

That depends on a lot of things. Most ARMs are actually proving to be cheaper than conventional mortgages today. What got people into trouble were those teaser rate arms and option ARMs, not traditional ARMs. ARMs are not inherently bad -- especially during periods of low interest rates, where they are generally 1-2% under what you pay for a fixed rate loan. If inflation kicks up (which will trigger higher interest rates) though, of course, you're screwed.

Austinhousingbubble says

I understand the fundamentals of debt in this context, but it is pretty far removed from our context here. I am merely weighing the benefits in swiftly defraying one your all time biggest expenses in life as opposed to nickel and diming yourself over the long term.

Retirement and your children's college educations are expenses as big as, if not bigger than, what you'll pay for housing. Putting that down payment money into a retirement funds and college savings funds would also defray one of your all time biggest expenses in life -- only do so more efficiently (especially since they are completely tax deductible, as opposed to just deducting mortgage interest when it comes to the house).

Austinhousingbubble says

Yes, but this is not the circumstances we presently enjoy. G. Soros had it right, when he recently stated that the real thing to fear is fear of hyperinflation. Deflation will more likely be the order of the day for many years to come, especially as interest rates go up.

George Soros is no better of an economist than tools like Krugman, who also think deflation is the monster to fear. The man was a one trick pony who engaged in what are now illegal activities to make most of his fortune. There are just as many, if not more, credible investors, businessmen, and economists worried about high inflation than are worried about deflation.

Note that I'm not worried about "hyperinflation". I'm thinking about inflation rates of 5-10% annually. It doesn't take long for those kinds of numbers to wipe out all sorts of debt.

Austinhousingbubble says

My point was that if you put 20% down on a house (or, God forbid, more) priced at current market value, in, say, 6 months to a year and a half from now, despite higher interest rates, you’re 20% goes much further toward the principal balance of the home.

Of course -- if waiting is an option, by all means WAIT. Buying now is a terrible idea.

But if you're buying *ANYWAY* (say, because you're just sick of renting and would like to paint the house whatever color you like or something), it would be a dumb decision to put 20% down if you could get away with only putting 3% down. That's my entire point here, and you seem to be missing it. The loan is cheaper than what you'll make from investments, plain and simple, and that makes it smarter to pay 3% and put the rest of the money elsewhere until it makes more sense to put it into the house instead.

Austinhousingbubble says

Not if the last eight years are any indication.

How so? The last 8 years had people making stupid decisions, and those people telling them not to make stupid decisions were just wasting their energy. Stupid people will make stupid decisions. Telling them not to make stupid decisions is a waste of energy -- spend that energy trying to get your congressman to pass legislation that will avoid the stupid mistakes instead.

Tude says

Misstrial says

Anyway: PLEASE LET US ALL KNOW where we can get 8-10 percent in this market of programmed trading and manipulation. Not even the hedgies are getting those rates of return in this enviro and Madoff was the one who consistently gave 10 percent returns even in down markets. So, I’m wondering who are you with??? Thanks!

Yes, yes please do! I too would like to know of a nice, safe place to put my emergency money where I can just sit and make 8%+ a year. Guess I must just be an idiot…

It's just a mix of vanguard funds (mostly their small cap fund at present). I put everything I had at the time (only about $30k) in bonds in late 2007 and held it there until January when I moved it all to the vanguard funds. I'm leaving it there until we see what happens with inflation. So far I'm up something like 35% this year, which has actually given me enough money to start thinking about a down payment on a house. Even if I took the ultra lazy approach and did nothing the funds have averaged a 7% return over the last 40 years (and that includes all 3 of the major crashes of the last 20 years). Their fees are tiny and well worth it.

If interest rates go above 8%, the down payment would likely be a better option, but interest rates won't go that high unless inflation really kicks up anyway. If the banks don't smell inflation, they will keep interest rates as low as possible.

Fireballsocal says

Tell that to the folks that lost 40% of their 401K because they “were in it for the long haul” or were told, ” Don’t touch it, it will come back”. There is no “safe” place to invest your money unless you use the bank of stearns and foster.

...except that wisdom is still true. "long haul" doesn't mean 5 or 10 years -- it means 40 or 50. The last decade has been rough, but do you have any idea where the S&P was 40 years ago? Even with the 40% drop off for 2008 it's up almost 7% adjusted for inflation annualized (and over 11% not adjusted) -- numbers that have held true all the way back to the 1800s. The S&P lost 40% in 1974 as well, and the massive inflation of the late 70s erased that lost very quickly.

Dig around a little bit and you'll find newspaper articles from the mid 70s lamenting the "long haul" advocates and claiming that the market would take 20 years to recover. There's nothing new here, really.

You start saving when you're 20 and by the time you're 65 or 70 that money has grown substantially -- even today, the single best "safe" investment that you could have made 20,30,40, or 50 years ago was an S&P index fund.

So your argument is that, because banks are doing evil and stupid things, you should spend your money poorly out of some misplaced sense of what is “right” or something? Why not take advantage of their evil and stupidity? It’s not like there’s anything you can do to stop them from making the same mistakes

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You know that wasn't my argument. I was merely pointing out what a folly it is to assume that banks won't lend to risky borrowers. While we're at it, though, suggesting we exploit the banks is a little myopic. This system of little down is designed to exploit the larcenist in all of us who wants a big slice of something for little or nothing. But this premium seems to be designed to keep people in debt and ultimately living beyond their means. It's reflected in what I see & hear around me - not just in the media. I love the the way you put the word RIGHT in inverted commas, by the way. I'm no Dudley Do-Right, but yes, there is a sense of contributing in some small way to another grandly rigged shell game being played out in a house of mirrors.

You can almost always put more money into your mortgage at any time. Early payment penalties are pretty rare, and easily avoided by going to a decent direct lender. If the market turns sour and you can’t realize returns better than your interest rate any longer, then you sell the stocks or whatever and pay off part of your house

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That's assuming that the stars align and your earning/contribution power remains at least par, or that you jump ship just at the right time. What if someone played this scenario out down the line circa 2008? I guess I'd just rather be able to have my nervous break down in the peace of my own domicile with a monthly payment consisting of navel lint and some old shoelaces.

It’s moronic because the loan is cheaper than what you can earn elsewhere. This is really a simple calculation:
if (amount saved per month by adding to down payment) > (amount made per month from other investments) then
put money into down payment
otherwise
put money into other investment

I can see this, especially if the down payment in question would devour your total net worth. In my unique situation, I could, with discipline, replenish the better part of my savings, and probably easier than I did with a lower monthly overhead, and not dime one of the down payment would come from any of my less liquid assets. I think lower monthly overhead would be better for most anyone. Your situation may be more charmed than most, but the reality is, most people I know would do better to have more wiggle room month to month.

Retirement and your children’s college educations are expenses as big as, if not bigger than, what you’ll pay for housing. Putting that down payment money into a retirement funds and college savings funds would also defray one of your all time biggest expenses in life — only do so more efficiently (especially since they are completely tax deductible, as opposed to just deducting mortgage interest when it comes to the house)

No kids in my personal situation, but if I did have, what is so terrible about letting them pay for their own tuition? I did. As for retirement, I would likely liquidate the largest part of my less liquid assets mentioned above. For some, this could be a baseball card collection or a Stradivarius Violin - things you will not be needing as much as the sciatica kicks in and the cataracts take hold. That said, it seems almost presumptuous to horde money for ones retirement. If I could choose, I would like to die at the drafting table. Besides, I may die before retirement is an issue. I say that without a tinge of morbidity. It really is a 50/50 crap shoot. And don't lob stats at me on life expectancy, and I won't lob some back at you on accidental deaths.

George Soros is no better of an economist than tools like Krugman, who also think deflation is the monster to fear. The man was a one trick pony who engaged in what are now illegal activities to make most of his fortune. There are just as many, if not more, credible investors, businessmen, and economists worried about high inflation than are worried about deflation.

I certainly wasn't lionizing the man, but even a stopped clock tells the right time... Iinflation of 5-10%...afforded by whom with what? Declining demand, rising unemployment and low output are not historical indicators of inflation
p

>How so? The last 8 years had people making stupid decisions, and those people telling them not to make stupid decisions were just wasting their energy. Stupid people will make stupid decisions. Telling them not to make stupid decisions is a waste of energy — spend that energy trying to get your congressman to pass legislation that will avoid the stupid mistakes instead.

All those people? I felt like a gnat crying in a gale during the bubble years. No matter how much I questioned the wisdom of friends who bought hugely overpriced houses with little to zero down, I was always the pariah of antiquated reasoning. I don't remember too many soothsayers in the mainstream media proselytizing prudence either. Maybe one?

But if you’re buying *ANYWAY* (say, because you’re just sick of renting and would like to paint the house whatever color you like or something), it would be a dumb decision to put 20% down if you could get away with only putting 3% down. That’s my entire point here, and you seem to be missing it. The loan is cheaper than what you’ll make from investments, plain and simple, and that makes it smarter to pay 3% and put the rest of the money elsewhere until it makes more sense to put it into the house instead

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No, no -- I see your point, and appreciate your contribution. As a skeptic, I'm just not on-board with the benefits of being on the thin edge of the wedge. As for investments, again, we are assuming a situation where all parameters are guaranteed to appreciate or remain at least par over the long term, in which case, your point has more gravity with me. But if you're being totally honest, then I think you'll agree with me that the music of chance has some sour notes, no matter how savvy your investments. Unless you've got someone gigging the system on your behalf. It happens you know.

You start saving when you’re 20 and by the time you’re 65 or 70 that money has grown substantially — even today, the single best “safe” investment that you could have made 20,30,40, or 50 years ago was an S&P index fund.

Yeah, but you have to have a crystal ball to know exactly when to pull out! I know several older 'long haul' friends who lost their asses thanks to market volatility.
You'd be better of buying a '59 Les Paul or first print novels.

If the banks don’t smell inflation, they will keep interest rates as low as possible.

Do they stop to smell their creations?

Hey, Austin:

As far as I see it, we're in a hiatus, like the end of the first act of a movie where the Hero wipes the sweat from his brow and says, "Whew! That was a close one!" and starts to gather the love interest up for a big smooch. Ya just know there's a bigger, badder-ass, world-destroying alien right around the corner.

Fundamental econ: Median Housing (TCO) above 3.5X Median Income, or over 13X gross rental receipts for the year is just not sustainable. That's what Patrick.net is all about. Your buddies buying substantially overpriced housing with 3% down or 20% down are going to have their asses handed to them on the next leg down, as are the banks that set them up. The next alien: Alt-A Resets. (BTW: are your buddies on fixed or variable rates?)

http://seekingalpha.com/article/118423-better-to-rent-than-buy-a-home

Kevin says

Of course — if waiting is an option, by all means WAIT. Buying now is a terrible idea.
But if you’re buying *ANYWAY* (say, because you’re just sick of renting and would like to paint the house whatever color you like or something), it would be a dumb decision to put 20% down if you could get away with only putting 3% down. That’s my entire point here, and you seem to be missing it. The loan is cheaper than what you’ll make from investments, plain and simple, and that makes it smarter to pay 3% and put the rest of the money elsewhere until it makes more sense to put it into the house instead.

How can this possibly be true when banks are paying less than 1% on savings and then lending that money out at a good profit?

So putting more money on a mortgage is clearly better than putting the money in a savings account or even buying a CD. And anywhere else you put money entails risk.

My wife and I are waiting for the right property in Bay Area and will put as little down as possible for several reasons:
1) money is still cheap
2) right now my money is returning %26 in the market
3) the return on a home will likely not be what we have seen that past 7 years
4) we plan on buying, staying, and raising a family

we have set a (low) limit on what we can afford (not live beyond our means) and will stick to it. if it doesn't happen, so be it. %3.5 is a good deal and we

great site!

jb1knobe: you are getting 26 percent returns in the market? What are you in? Not even hedge funds (the ones that are left) are making those kinds of returns.

If you really are making 26% returns (which I do not think you are, more like .26%) you're not factoring risk and so you will probably end up losing it all. The bond and equity markets along with PMs are HIGHLY MANIPULATED by programmed trading, Goldman Sacks controlling about 25% of all trades. GS has the trading capability and political power to move the market with huge, sudden trades that wipe out investors of all stripes.

One money manager I know personally is experiencing 50/50 success in the markets since January and he has 40 (forty) years of money management experience and has advised Credit Suisse, Citi, State Street, GS, Fidelity and various news organizations for over ten years. He's making 3& here, 7% there, an occasional 10%, but mostly 2 and 3% here and there using calls, puts, shorts.

p>My wife and I are waiting for the right property in Bay Area and will put as little down as possible.

Unfortunately, the fact that you are able to put as little down as possible will keep the prices artificially high. Is this really reason to rejoice?

Austin: I'm thinking this jb1 is a troll.

NO ONE can make 26% in this market. The top rate for corporate junk bonds is 15% and that's with a HUGE amount of risk that the bond investor will lose it all (think of the GM bondholders here).

On the borrowing side:

Given a recession with a more honest (including people who want to work but have given up on the search and people working part-time when they need full-time work but not including the under-employed working 40 hours a week) unemployment rate of 16.5% with job losses as a percent of population worse than all post WWII recessions except 1948 (1953, 58, 60, 74, 80, 81, 90, 2001, 07) it would be prudent to keep a cash cushion in case you join the unemployed.

Property values are still out of line with sustainable levels and long term historic norms. Limiting equity to limit real losses makes a lot of sense especially in no-recourse states, and especially with a job market that may force a move.

On the lending side:

In most places property taxes are based on property values and governments have increased spending to match the revenues resulting from artificially inflated prices due to people unable to afford the true cost of property pumping things up. Lower down payments limit how fast that can slip.

Political creatures are all into staying in power by giving benefits to the great state, district, party, or appointing official of wherever; like keeping their tax revenues up.

Bankers like to buy congress critters. Bankers want to limit their loss realizations from their REO sales. At some point they may want to launder their balance sheets which will be helped by artificially inflated property values.

The real-estate industry likes to rent representatives and senators. Many fund themselves with commissions made larger and/or more numerous due to an artificially inflated market opened to people who are less likely to survive it long term.

It makes _perfect_ sense.

StillLooking says

So putting more money on a mortgage is clearly better than putting the money in a savings account or even buying a CD. And anywhere else you put money entails risk.

Bonds (corporate or government) will beat both the savings and CDs and have similar (i.e. near zero) risk.

As far as "clearly better" -- how? It seems like almost a guarantee that housing will continue to go down. If you only put 3% down, you only have 3% to lose, whereas if you put 20% down, you have 20% to lose. How is that less risky than the stock market, commodities, investing in a startup, or starting your own business?

Since I can rent for less than 1/3 of what it would cost to buy I will continue to rent and put the difference in the bank. When and if the cost of buying approaches the cost of renting (this will be the housing bottom as sure as the sun will rise in the east) I will put 20% down and take a 15 yr loan.

Say I am buying a house for a $300,000 house with 20% ($60,00) down getting a 30yr 5.25 for $240,000 there will be a total cost of $477,104. Same numbers with 15yr $347,275. However you usually get 15yr at half a point off so 15yr at 4.75 total of $336,000. This is a difference of $141,104. I would be very hard pressed to take the $60,000 down payment and make $141,104 in 15 years with it. That would be about 23% simple return. Should the interest rate get higher, almost a certainty since rates are near historic lows and the federal government is about to borrow huge amounts of money, the spread gets much more dramatic fast.

Then again, I made the foolish mistakes of selling my house in 2006 and getting out of stocks when the dow hit 13,500 despite all the experts saying what a terrible choices I was making, so what do I know?

Kevin is right on the down payment front - if you view your house purely as an investment that you're willing to walk away from, and especially if you live in an imploding real estate market, making a minimal down payment is the way to go. On the other hand if you live in a state where mortgages are recouse loans, you have substantial assets outside your house and your local real estate market is stable, the case for paying down the mortgage is stronger.

The bigger issue is why in the world are tax payers taking the risk of originating these 3% down payment loans? There are two scenarios: 1) Buyer could make a bigger down payment, chooses not to do so. In this case, the taxpayers are just funding the buyer's chase of higher investment returns. 2) Buyer can barely make the 3% down payment. This is scary - what happens when the house needs a new water heater or roof...basically the .gov is lending to people 2 paychecks away from default. I think scenario 2 likely accounts for a majority of FHA buyers and nothing would please me more than to see the down payment requirement raised to 8-10% and a premium charged to buyers in non-recourse states.

Interesting debate, but I think most of you are missing the big picture.

3% down mortgages should not exist and the Government should definitely not be providing them. If everyone had to put 20% down housing would be affordable and one wouldn't need a mortgage with 33x leverage.

Texas requires a 20% down payment of its banks and the state neither experienced the full extent of the housing bubble nor will it suffer the same level bank failures and foreclosures.

Prior to 1929 people could put 10% down to buy stocks. A stock market bubble manifest itself and the environment in which the Government could perpetuate a Depression was created. At least we learned from that experience and today we have a 50% margin requirement.

Apparently we have learned nothing from the Housing Bubble and are still willing to remove the impediments to Homeownership (credit, capital and cash flow) which regulate and inhibit housing prices based on reality.

Whitney, your underlying point is correct. From what i read, you are essentially making the monetary argument. Easy money = no worry spending. Although with your "20% down on homes" solution this mess would not have happened, so would forcing people to buy houses cash. One could also do 5% or 10% down on primary home and 50% down on investment homes.

There are many "solutions". The problem is, the government has no right to tell people what to do with their money!

The main culprit in this mess (and there are many from banks to consumers), is the government with their manipulation of interest rates, creating easy money, Fannie Freddy and many, many other government acts to help people achieve the, as G.W. Bush put it ... "American Dream of owning a home".

Im ok with the idea of 3 percent down or even nothing down mortgages, the problem I have is that we are bailing out the banks that make these loans. If you want to pay that and someone in the private sector wants to finance you at whatever return they want, GREAT. Problem here is they made the loans, they failed, now we as a society pay them back collectively in the form of taxes or fees.

The reason they offer these programs still is two-fold, one--- there arent enough people with 20 percent down to buy and if they didnt let people with very little money borrow, the housing market would crumble even further to AFFORDABLE PRICES, and God knows they dont want to lose all of that theoretical wealth they still have. TWO- the banks and Wall St. know for a fact, I mean FACT, that they will be bailed out at the end of the day..... no risk, all gain.

Kevin's reasoning is for speculators, not average home buyers. His reasoning also further distances the debate from personal responsibility to "risk" and accounting; people like to hear this because it removes all burden for them to act based on any moral stance. Instead, Kevin proposes that laws can be changed to shape human behavior. This reflects his achievement (as shown in his advice at least) of the most basic stage of moral development. In terms of social development, he is morally stunted.

I also feel that Kevin is a very smart person, who most likely has used his knowledge to make a decent living. His advice, however, needs to be seen for what it is: a rehashing of Oliver Stone's famous character. Greed can be good, but it is never a healthy way to live ones life...
Getting back to the subject at hand. People like to feel as if they can get something for nothing. Low down payments are based on a psychological need to "win the game;" however, the social cost associated with such behaviors is very high. Do you want to live in a neighborhood of people who, when things in RE become unstable, are prepared to walk away (and thus lower your quality of life and ROI)?

Kevin does not discuss the social costs, only the ROI. This one-sided perspective is what lead to our present (sad) state of RE.