patrick.net

Troy says

I think klarek’s right on the loss of 20% down being contributory and I need to walk back on that, but:

All those additional buyers that made up the portion of surging demand who couldn’t save one red cent for a down payment would have remained renters.

Renters constrain supply too.

The rising number of able buyers thanks to lower DP requirements did in fact prompt construction in areas, increasing supply.

20% down payment wouldn’t have stopped this bubble:

Meh, that supply was always a couple of years behind the demand. Hence, home construction today is at its lowest level in recorded history. The point is that it couldn't saturate the boom in demand. If it could, those price increases would have been mitigated. Were there a 20% DP requirement, those increases wouldn't just be mitigated, they probably couldn't have happened. In addition all the reasons I mentioned above, a high DP requirement would have kept people from falling underwater. I don't think that the default rate on people with enough equity to cover the sales cost of their house is very high. Do you?

Troy says

Not to weasel here, but correlation does not require causation.

I didn't say it was exclusively the causal factor, I said it could have been a preventative factor. The further underwater someone is, the more likely they will default. The less money somebody puts down on a house no matter what kind of market they are in, the more likely they will default.

This is not complicated logic. You said that there's nothing wrong with 0% DP. The housing bubble begs to differ. They could have come up with every ridiculous and "creative" loan they wanted, it wouldn't have mattered were there stringent DP requirements.

Troy says

This is an argument about desired policy now, and as of now we’ve fixed the bad loan ideas.

No, we've just moved them to Fannie, Freddie, and FHA. It won't blow up in spectacular fashion, but the losses are on the taxpayers' books now. I might be wrong, but from your past posts, I have a feeling that your desired policy would be anything that the govt can do to get involved. It shouldn't surprise me that you'd defend a zero-down policy and make-believe it has nothing to do with the housing bubble.

It’s my argument that zero down is not a significant risk factor going forward, as long as we can avoid further negative influences to home prices, like $20 gas, the return of Clinton tax rates on everyone, government employment and/or wages imploding, 8% interest rates without 8% wage inflation, etc.

Of course it's a significant risk factor. I think you need to re-examine the correlations between % down payment and the default rate. Downward forces on housing prices are not preventable, and even a demographic shift such as the baby boomers retiring and selling their expensive houses will put those with close to zero-down underwater and defaulting in very high numbers.

klarek says

we’ve just moved them to Fannie, Freddie, and FHA

nice dodge but you're really missing the point here. The "bad loan ideas" were those that ARTIFICIALLY and TEMPORARILY increased buying power.

Teaser rates. IO/Negative am/pay option. Stated income.

These all increased buying power by temporarily lowering the monthly payment, but all this did was push prices up as people bid on what they can afford.

Zero down is not an affordability measure -- it actually make houses LESS affordable than 80% down for obvious reasons -- so it does not serve to directly juice home values.

If a home buyer can afford a zero down loan payment, they'll have equity -- skin in the game -- soon enough, and not having to clean out their savings to buy a home gives them a buffer, too.

The further underwater someone is, the more likely they will default.

All this talk of "underwater" is missing the primary cause where this "water" came from in the first place.

It wasn't zero down that caused the market to rise past affordability and thus later put millions of home-debtors underwater.

Markets can only go underwater when that which cannot continue no longer does.

Zero down could continue and is sustainable now, which is why it is still with us. The neutron-bomb loans and cash-out refis were the primary causes of the bubble -- people were even pulling cash out of their own homes to buy specuvestor flips -- 20% down would only have slowed this down and not stopped it.

80% LTV does limit the supply of new buyers, keeping them in rental housing stock and thus enriching the predatory specuvestor class that is parasitically latched onto them and their paychecks.

Like I first said above, I would be perfectly happy to see the return of 20% down if the parasitical specuvestor class buying up SFHs now were encouraged to find more productive uses of their money.

20% down is just an artificial barrier to keep renters renting and lining the pockets of landlord parasites.

demographic shift such as the baby boomers retiring and selling their expensive houses will put those with close to zero-down underwater and defaulting in very high numbers

There's an immense amount of pent-up demand and people who default have to live somewhere anyway so I don't see zero-down default effects being in any way significant.

Downward forces on housing prices are not preventable

Some are, some aren't. Depends on how prices got there in the first place. Due to inflation, the general direction is UP.

"Agreed, and I think it’s insane that non-recourse is still a provision of mortgages today."

Why do you think that? If you default on the mortage, the hosue gets re-possessed. If you have collateral, then there is no need for a recourse loan.

Troy says

f a home buyer can afford a zero down loan payment, they’ll have equity — skin in the game — soon enough,

Not true. As I pointed out earlier, it takes more than 10 years just to get to 20% equity from 0 on a 30 year fixed.

Troy says

Zero down could continue and is sustainable now, which is why it is still with us.

Also, not true. If this was sustainable, more private parties would be doing it without government support in the form of FHA. 0% down means higher risk, so interest rates will be higher on 0% down loans if we have a true market, as opposed to government guarantees.

You got it right again. Those were the roots of the problem, not 0% - 3.5% down. NAR is doing 1st time home buyers a favor.
Some people are so blinded by their anger and hatred, and sometimes miss the point. All I can say is “Be careful what you wish for.”
Be formless, shapeless, like water - Bruce Lee

Hmm...not sure I follow this. I understand your argument but I fail to see how it would actually hurt the home buyer.

Sure, it would take longer to buy because you have to save the down payment, but there would also be a drastic decrease in prices of homes.

People buying houses for themselves to live in are still the majority of home buyers. If the majority of people could not buy a home starting tomorrow (b/c of the 20% req) then the price of homes drop drastically because the demand just got obliterated.

Yes, it wouldn't drop as much as if there were no vultures, i mean investors, but it would still drop substantially. And the demand for rental units wouldn't necessarily increase because most people contemplating a house purchase are not currently homeless, meaning they wouldn't need a place to rent. So if rents dont increase, the supply isn't likely to be gobbled up by a surge of new investor interest.
And again, I recognize there will be increased investor interest, but the majority of house buyers will be sidelined. (and arguably, with a substantial increase in rental units, there will be a decrease in rent prices, further benefiting the person currently renting and contemplating a house purchase)

As a renter I could care less who my landlord is as long as she does what she needs to do.

As a prospective buyer, I would much rather have to save 20% to buy a $600k house then put 0% to buy a $750k house.

So I guess thanks NAR, but no thanks.

ih8alameda2 says

As a prospective buyer, I would much rather have to save 20% to buy a $600k house then put 0% to buy a $750k house.

Exactly. And you'd much rather pay a lower interest rate on that $600K house rather than a higher rate on a $750K loan.

Low interest rates are propping up home prices now. I'd rather pay 8% on a $500K loan rather than 5% on an $800K loan, even though both start out with an annualized $40K in interest.

We need a grand rethinking about home ownership. It makes sense for some people, but not for everyone. If you will move again in the short-term, buying isn't for you. If you need to be mobile to find new job opportunities, buying isn't for you. If you can't responsibly pay your mortgage, buying isn't for you. If you need something to force you to save money, buying could be for you, since home buying often functions as forced savings for some people.

People have been on the "primary residence as an investment" train for way too long. The whole concept of a starter home isn't meant to be a good investment. It is meant to require an extra fee for realtors. What we saw in the boom years was not investment, but rather speculation.

corntrollio says

it takes more than 10 years just to get to 20% equity from 0 on a 30 year fixed.

10% equity is reached in year 4 and 15% equity is reached in year 7.

In year 9, assuming a flat market, upon reaching the magic 20% safe zone the buyer will have paid 10% of the principal as PMI (~7% after-tax).

If this was sustainable, more private parties would be doing it without government support in the form of FHA.

There's more an interest rate risk than a default risk right now.

By "sustainable" I just mean non-temporary price support. Yes, low-down has increased risk of loss to the lender, that's why there's PMI.

There is substantial downside risk in the market now, but I don't think the PTB want to go there, because if we do there will be no bailout large enough to cover the $4T overhang between debt and value:

http://research.stlouisfed.org/fred2/graph/?g=xe

we are facing if this is still a down market.

E-man says

NAR is doing 1st time home buyers a favor

Helping to inflate home prices does no one any favors.

The NAR lobbying of Congress benefits their minions with higher commissions. Clearly self dealing and very corrupt. We have repeated learned higher prices dont help the local industries and job markets. In fact it allows for all reasons to move jobs away from inflated areas. Higher home prices require higher salaries which local employers will not provide when they can get it elsewhere.

"We have repeated learned higher prices dont help the local industries and job markets. In fact it allows for all reasons to move jobs away from inflated areas."

Give me one example of companies moving away from "inflated areas." Is Wall St. leaving high priced Manhattan? Are tech companies leaving high priced Silicon Valley? In case you did not know, big companies don't give a rat's butt about real estate values. In many cases, when they open up show, they get massive subsdies from the govt. so the real estate is basically free.

The interest rate will go up after all these baby boomer retirees run out of cash due to low interest rate.

At 1%, they will run out at no time.
Then they are forced to sell their big houses.

APOCALYPSEFUCK says

The NAR should be disbanded and all its members indicted under RICO and stuffed into federal penitentiaries for life to provide brides for neonazi serial killers.

You're such a softy!

"it would take 14 years for a typical person to save up a 20% down payment to buy a median-priced home."

If the price of a median priced home were allowed to fall to it's natural level, that is without the NAR or the federal government pushing it as high as possible, a 20% down payment would be a lower number and take less time to accumulate.

@Katy Perry

Welcome to Japan!

E-man says

You got it right again. Those were the roots of the problem, not 0% - 3.5% down. NAR is doing 1st time home buyers a favor.

I like your sense of humor.

I love the short sightedness of the NAR. If prices fell, volume would pick up. They'd make less per sale, but would have more sales.

RealisticOptimist says

I love the short sightedness of the NAR. If prices fell, volume would pick up. They’d make less per sale, but would have more sales.

Very true. The people within NAR aren't very bright. Diabolical, but dumb.

RealisticOptimist says

I love the short sightedness of the NAR. If prices fell, volume would pick up. They’d make less per sale, but would have more sales.

What would those lazy bastards want? The most amount of proft doing the least amount of work. So, lot of sales volume at less price will force them do more work for the same profit, and that's the part they don't like. Better take higher commission and keep the work load low.

When prices go down, more people will buy. But, will more people sell? People who have paid a high price will not be in a hurry to sell at a lower price. People who wanted to get the maximum from their house and retire have already done it during the boom. The only sellers left (read supply) would be the defaulters. However, if the price goes down, they would want to get some kind of re-adjustment deal from their lenders.

newbie says

When prices go down, more people will buy.

This is not correct. Actually your entire post is just bizarre, but this one line here struck me as the most incorrect.

klarek says

RealisticOptimist says

I love the short sightedness of the NAR. If prices fell, volume would pick up. They’d make less per sale, but would have more sales.

Very true. The people within NAR aren’t very bright. Diabolical, but dumb.

Don't matter. They will survive as long as a home is considered as a nest egg by buyers. Sad but very true. Some people are born with that Karma of money making without working for it.

newbie says

People who have paid a high price will not be in a hurry to sell at a lower price..

They are just putting their money making dream on hold for few years - if they are lucky enough, not to default.

Scum..realtors..the beginning of the "housing scam"...this is the worst group of sales people on the planet...even with home inspections...you cannot keep up with the subtle lies..told by this group...many of these individuals should be jailed....used car sales people have more integrity...they are only selling you a car...this [a home] is your life investment...and there is never a "bad one"....do nothing no nothing....and get a raise every year...1000's in commision..when houses sold in a day..or were pre-sold..."housing" WORST INVESTMENT" you can make as the article say's..."COMMISIONS"...all sales done on the internet and they still want their money...20% on something that is overprice at 30 %...then maintain it...and pay the taxes! HUH? Am I missing something here?..So when this scum shows up...he or she is as excited as a new born puppy at it's first meal...and your it sucker.

"When prices go down, more people will buy."

So then why are more peopel not buying right now? Why did more peopel buy when prices were gong up then when they are going down. When prices go down, fewer people buy. That is how it has always worked.

HousingWatcher says

“When prices go down, more people will buy.”
So then why are more peopel not buying right now? Why did more peopel buy when prices were gong up then when they are going down. When prices go down, fewer people buy. That is how it has always worked.

Because supply and demand are constantly being manipulated. All things being equal, lower prices increase consumption. This is a very fundamental economic concept.

klarek says

All things being equal, lower prices increase consumption. This is a very fundamental economic concept.

Thing is, houses aren't so much as consumed as occupied.

Land and housing is a very odd capital good.

There's no substitute for land unless you live in a zeppelin, or on the seven seas.

We all "consume" housing whether we rent or buy. The only way to "consume" less housing is to room up with people, or live like a caveman.

klarek says

HousingWatcher says

“When prices go down, more people will buy.”

So then why are more peopel not buying right now? Why did more peopel buy when prices were gong up then when they are going down. When prices go down, fewer people buy. That is how it has always worked.

Investor behavior often goes against the supply and demand rule that drives consumption and spending.

Because supply and demand are constantly being manipulated. All things being equal, lower prices increase consumption. This is a very fundamental economic concept.

There are people sitting on the fence for a while. The reason they are sitting on the fence is simple. They are not sure if the market has bottomed. Once the price stabilizes, they will start buying. The other reason is the amount they have to pay per month for mortgage (plus tax and ins) vs the rent they are paying has to be close and at equilibrium. Say I am paying $2200 as rent and my monthly mortgage would be around $2500 - $3500 if I buyg. Should I keep on sitting on the fence or buy? Of course this is assuming the prices have stabilized and the interest rate is not going down any more.

If the rent goes down, I would keep on renting. If the rent creeps up and the price goes down, they will reach equilibrium at some point. That's the time to buy.

Third factor - you are getting old sitting on the fence. No point buying a house if you have to wait till your retirement age to buy a house. (that's when you sell and go to Washington/Oregon/Nevada/Arizona/Mississippi... wherever )

On a different note, I feel the middlemen should be eliminated from the real estate business. Why do we need a realtor in the first place? The work they do is not commensurate with the commission they earn.

newbie says

Why do we need a realtor in the first place?

Buyers don't need realtors, sellers do.

Hopefully FSBO will become a first-class citizen in online listings, and any industry resistance will be eliminated by the government as anti-competitive abuse of monopoly market position.

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

The question isn't the service, it's their 6% cut, as you say.

Troy says

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

All you need is an Contracts Attorney and a legal assistant to handle such services. All this takes about 2-3 hours tops. You may be out $1-2K but that is small change compared to $30,000 ( $500,0000 * 6%) in commissions. Sadly most state laws, drawn by realtor interest groups have created like you said a monopoly.

If govt got out of lending, private lenders would not lend at 3.5% they would require a 20% downpayment. and no one in their right mind would lend without having the closing costs as downpayment.
This is how private lenders would price risk. The risk is actually the same and doesnt magically change just because the goverment is calculating it.

E-man says

By then, most of you wouldn’t have a job to buy a house.

What if buy home now and no job later to pay mortgage? I guess you are right there will always be some program like HAMP :)

we are back in business Patrick. Time to start writing to Congress. Love this thread.

CA Senators:

http://boxer.senate.gov/en/contact/
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

ChrisLA says

CA Senators:
http://boxer.senate.gov/en/contact/
http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

Oh yea..like that is gonna help. I dont think so!

thomas.wong1986 says

ChrisLA says

CA Senators:

http://boxer.senate.gov/en/contact/

http://feinstein.senate.gov/public/index.cfm?FuseAction=ContactUs.Home

Oh yea..like that is gonna help. I dont think so!

you have a better option?

yeah, don't tilt at windmills.

3.5% down is not a big deal. Every year the mortgage is paid, LTV goes down 1.6% or more -- thus after only 3 years the buyer has another 5+% of "skin in the game" and has also paid 3.45% in monthly PMI, for an effective LTV of under 90% already, halfway to the magical 80% LTV of perfect safety.

As long as home prices are flat or slightly declining from here, low down payments don't present any great systemic risk to the system.

People rallying against them are either idiots or have a hidden agenda.

If home values crash from here the system is going to have much, much larger problems than the new buyers who've come into the market now.

Remember, lending stayed elevated at over $800B/yr for most of the last decade:

http://research.stlouisfed.org/fred2/graph/?g=yX

lending activity now is miniscule compared to the bubble, and thus its risk is also miniscule compared to the bubble debt that is still on the books:

http://research.stlouisfed.org/fred2/graph/?g=yY

Blue line is total homeowner debt.
Red line is total homeowner asset value.

Note the red line has fallen $6T since the peak, while the blue line has mostly still just topped out. The St Louis Fed doesn't break this down by new loan volume, but overall loan volume is still net negative, with more default losses than new loans being taken out.

newbie says

There are people sitting on the fence for a while. The reason they are sitting on the fence is simple. They are not sure if the market has bottomed. Once the price stabilizes, they will start buying. The other reason is the amount they have to pay per month for mortgage (plus tax and ins) vs the rent they are paying has to be close and at equilibrium. .

Do you think some folks are reluctant to purchase a home because they are not confident about their income (/job?).

thomas.wong1986 says

Troy says

Still, even FSBO could use a real estate agent-like service to get escrow through the title company and loan process.

All you need is an Contracts Attorney You may be out $1-2K

That is what we did when the home we picked out to buy was FSBO. It was less than $1k but that was 20 years ago.

E-man says

I know some of you meant well for wanting lower home prices, but TPTB would not let this happen because they are freaking scare of the potential deflation feeding on itself as mentioned above.

I hate to break it to you, but TPTB cannot stop housing prices from correcting. I hate to burst your bubble, but prices fell substantially from 2006 to 2009, and now are continuing their descent. There's nothing you or congress can do about it except pray to all holiness that a miracle will keep the bubble inflated. I'm not going to make any money bets on your ability to channel divine powers to perform such a feat.