patrick.net

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.

In regards to getting a 26 return in the current market that is a very easy number to come up with. All you have to do base your returns from when the market was at the 6400 range earlier year and pretend all of the loses took before then never occured. Since march, I think I have made over 26%, in fact I think I have made closer to 40%. Using this as a bases I think I will go ahead and claim that I am getting over an 80% annual return. All I have to do is ignore all of the loses that took place before the market started going up again and make the assumption that the market will magically continue to go up at the same rate it has been over the last 4 months.

You know what I don't see in this argument. Most people will need their housing to be paid off to live comfortably in retirement. A 30 year old can put a 3% down and probably be ok if he's chosen a field where he has full employment for the duration. But for others it's going to get a bit tricky. Many cite an expectation that American wages will contract over time to remain competitive w/other nations so I wouldn't be expecting the raises going forward the Gen Xers experienced.

Alain, I was confused by your comment that the government has no right to tell people what to do with their money. Since buyers are only putting 3% down its actually other people's money, namely the pension plans and bondholders that repurchase the mortgages from the banks that is at issue.

It's so odd to be on a housing blog and listen to people who don't realize how our banks came to the credit precipice they did last October. Quite simply there's too much credit in the system for the pyramid credit system infrastructure to maintain integrity. Credit needs to contract so we can return to growth. 97% LTV in a declining economic environment is not credit contraction. In a declining market 97% will soon be 125%. Those are the standards (lack thereof, actually) that created the bubble in the first place.

In another thread Kevin said:

"Your friends need better accountants. A vacation home in a tax haven state is all it takes to ensure that you won’t pay anything in CA." (Does this check with anyone else? Then why don't all wealthy Californians keep a "vacation" shack in Florida?)

Kevin also said one needs a better "financial advisor" if one is not making a steady 8% implied low risk return. (Kevin, unless this is highly proprietary info, please answer those who asked you how you are getting such a great return).

By using the "better accountant/better advisor" logic, maybe the problem with buying a rental to lease out profitably is merely finding a "better realtor" to acquire the house cheap enough, and a "better property manager" to acquire premium rents.

Austinhousingbubble: Thank you for your insight.
Seemingly, there are many folks on this posting who are not interested in purchasing a HOME, but rather seeking ways of INVESTING and FLIPPING. I do understand all of what you've suggested and have taken all of your points well. It's always a good thing to know there are folks out there that are advocating for people who look to home purchasing as a means for HOME and security and not to the new climate of Get Rich Quick trend and fallacy.
Here's to saving 20% in order for a more manageable quality of life!
R

From The Market Ticker:
"This is REALLY BIG folks:

NEW YORK, July 16 (Reuters) - Mortgage insurer MGIC Investment Corp reported a wider quarterly loss and said it will stop writing new business as losses mount in the battered housing sector, sending its shares down 14 percent in premarket trade.

You basically cannot finance a home purchase with more than 80% LTV (loan to value) without private mortgage insurance - that is, insurance that covers the lender if you default and they take a loss.

MGIC (NYSE: MTG) is the largest issuer in this area. They said they will be "trying" to capitalize a new company to write this business, but their continuing losses - which, by the way, they said they thought they had under control last year after repeated flirtations with going under outright - has apparently forced this decision."
Then end of less than 20% down is near.

mickrussom says

You’re a gas. Seems like massive account deficits, the clamoring of the BRIC countries to consider a new reserve currency and the massive oligarchical manipulations by Goldman Sachs unabated which are continuing to destroy the market and the US seems not to figure into your mentality. The rules can change very suddenly at anytime, and pie in the sky statements like this have the tendency to look very foolish. We’ve been predicting the housing collapse here since 2005 (at least I have personally) and I can imaging you telling me something like “get it now, it only goes up” , bonds have no risk. Lol, interesting statement. Tell that to a Chrysler bondholder or someone who had munis in Vallejo or some other town like that.

Do you believe that the risk of the treasury defaulting on its debt is greater than the risk of the FDIC going under? If so, why? It seems to me that they would both happen at the same time, or not at all. Hence, bonds == just as safe as savings.

Gotta love the Kevin's of this world. Sneering certainty in financial matters is a sure fire guarantee the speaker has no idea what they are talking about.
Despite the absurdity of claiming a positive return from Vanguard small cap investment's since late 2007 I do - unfortunately for Kevin - know where the market was 40 years ago.
The S&P was at 99.61 in July 1961. Adjusting for inflation using BLS data we get 585.43. Today we are at 943.72 which is a 1.2% compound rate of return.

You are being lied to by your "financial advisor". Vanguard's small cap ETF VB is down 37% since you said you bought it. This means you need a further rally of 59% simply to break even.

Most people struggle with basic math which is why Wall Street pulls so much money out of people's pockets every year. Kevin is the classic type that "wins" $1,000 when he visits Vegas but forgets to mention that he started with $2,000.

My two cents on the above discussion:

I agree with AustinHousingBubble in an overall respect. My primary issue with the 3% down is not that I am upset at people utilizing it. I am upset that it is even being ALLOWED or offerred by the banks in the first place.

It completely baffles me that just six to nine months ago, we sat at the precipace of the worst financial debacle since the Great Depression. And now, I swear that the short term memory of the average American has completely forgotten what happened and now things everything will return to the same 'ra ra' status we had before. It is asinine to think that way.

But back to the 3% down discussion. If people are using that to get their foot in the door, that is their prerogative. What I think they are doing is catching a falling knife. A lot of the statements above are far too simplistic when they are attempting to justify home purchases. If housing is still falling, it makes absolutely NO sense to purchase. Regardless of how cheap money appears to be. The primary reason for that is that you cannot predict when you may need to SELL your home.

Say for example, you use the current easy money rules and purchase something now. You put down 3% and leverage yourself to the hilt. Now suppose that 5 years down the road, you need to sell that house for a reason you did not anticipate. (Job loss, divorce, job transfer, etc) The house is now worth 20% less than what you paid for it. Meaning that you are underwater. So you have two choices at that stage: sell the home and incur the loss or walk away. How are EITHER of those scenarios good? The first one will likely eliminate your chances of purchasing a follow-up home because your savings would have been used to cover the loss. And the second one will likely negate your chances of buying a second home as well since a foreclosure will crush your credit.

Ultimately, the major issue I have with the current environment is that it is delaying the inevitable rather than just letting things return to normality. We are following the Japanese method of dealing with an asset bubble burst. So did that turn out for them? How are those folks that bought 2-5 years after the bubble had burst doing? Probably not too well.

In the end, I see absolutely no reason to buy ANYTHING if one is relatively certain that it will be at a cheaper price down the road. Whether you rent or buy on credit, you are burning money in either scenario. And with the massive disparity that currently exists between rents and mortgages (even at lower interest rates) it is completely moronic to let your emotions get the better of you and dive into a property that is guaranteed to depreciate. I don't care how you justify the math, it makes absolutely NO sense.

If I was in charge, I would solve this crisis once and for all by mandating that the MINIMUM down payment an individual must put down would be 20%. I would also alter the foreclosure rules and remove a lot of the 'no recourse' clauses that exist in certain states to ensure that people understand they are obligated to adhere to their contractural obligations when they purchase a home.
If the above concepts were enacted, what would happen to house prices? They would plummet and return to EXACTLY WHERE THEY ARE SUPPOSED TO BE! Which is precisely what needs to occur.

Oh, and on a sidebar, I would also have broad reaching arrests and trials for all the folks that helped contribute to this disaster. All the realtors who pumped this bubble. All the collusion that occured between appraisers, brokers and realtors would be prosecuted. All the outright fraud would be dealt with. And all these bigwigs at the investment banks that created this asinine derivaties engine would get some visits from the IRS.

And in case you are wondering how I would make room in the prisons for all these folks. That's simple. I end the war on drugs and release the people who were incarcirated for simple drug offenses and instead replace them with the above folks. :-)

The answer to this riddle is simple; those buyers are a bunch of idiots and when they're bankrupt, I'll be laughing my ass off at their stupidity. It doesn't surprise me but sadly, America should be considered one of the most ignorant, undereducated, naive countries in the world with England right behind us.

The question I've been asking of late is: How much is enough?? You allow yourselves to be looted of all your assets while simulataneously allowing your rights and liberties to be infringed upon, where does it end?
-When a police officer or soldier pounds your kids skull into the pavement for kicks?
-When you're starving for food with a handful of worthless paper dollars?
-When your retirement account is empty and you find that you've worked all your life for nothing?

It's time for Americans to man-up and grow a pair. If you don't feel this way, suffer the consequences in silence. I don't want to see those people here crying their sob story because I don't have the time to care.

As they say, God helps those who help themselves..................................

We put down 25% (more, actually) on our house in 04. It's all gone today, plus about 15% more (and still dropping). When we get kicked out of this place (sometime around 2011, I'm guessing), and after the "cleansing" period of 5 years (probably less, as I'm guessing there will be a Great Credit Amnesty, not so much to help us as the banks) I will never put down more than the bare-ass minimum again. If I buy. Not too sure about that either.

20% sounds fair, I'll agree to that. Just a few things first, I'd also like to see a return of my: pension plan, career security, my last job returned from India, full employer-provided health & dental insurance, elimination of the 5 "pre-tax" funding deductions on my pay-check, the ability of my wife to stay at home and avoid child care, reduction or the $10k + 3K I pay a year in property taxes and HA diues...and a few other things like the answer to why my utilities bill is $450+ a month even though I have an "energy-efficient" new home.

The pont is: everything has changed. The average guy's financial condition and security has been under attack from every conceivable direction, to go back to a 20% mentality and ignore everything else is intellecutally dishonest and talk show silliness.

I don't see any reason to be heaping scorn on the 3% down payment at all. Here is my take - To the extent that they are first time home buyers who qualify based on documented income and the criteria of a monthly payment being between 30% - 38% of their household income and the loan is NOT an interest only loan, I would think that it would be acceptable, given the low home prices at this time, which are expected to recover in the next 5 years. Now is the time to encourage all those exotic financing schemes really and NOT when the home prices start to go up! All those exotic financing schemes should be choked off as prices start moving up and they go above the historic Household income-Home price co-relation trend levels!

uslawman says

the ability of my wife to stay at home and avoid child care, reduction or the $10k + 3K I pay a year in property taxes and HA diues…and a few other things like the answer to why my utilities bill is $450+ a month even though I have an “energy-efficient” new home.

It seems like those items were choices. You could have had the stay-at-home wife, etc, if you chose a more modest lifestyle. Sounds like you live in an upscale house, which brings the high taxes/HA fees, which altogether requires two incomes to pay for.

Kevin says

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.

That's actually not a true statement:
http://globaleconomicanalysis.blogspot.com/2009/06/long-term-buy-and-hold-is-still-bad.html

I have a question. I know there is a big focus on the FHA loans, but I was wondering what thoughts everybody has on the VA loans that don't require any downpayments. Do you feel that these are the same or worse than FHA loans that only require 3% down? I just ask because we recently used one to buy our first home and wonder if users of the VA are perceived the same as FHA users. We weren't able to save a down payment because when we moved to the area we currently live in (my husband's job required that we move 3 years ago), we had another home that we could not sell (and have yet to sell at this point) and had to make payments on for 3 years, in addition to the rent we paid for the places we actually lived in- in actuality, the other property is in my in-law's name and we were going to buy it from them once we got settled- it was their way of helping us get started. However, my husband got a great job offer that required us to move and when my in laws put it up for sale, they priced it too high and we were never able to sell it. This was a big bone of contention for me as I felt that we lost our chance to get rid of the place and basically chased the market down, but we have a moral responsibility to hold up our end of the deal and not leave them to make the payments or ruin their credit by defaulting. We were going to just rent a house as we outgrew apartment living, but the cost of renting a house for us would be several hundred dollars a month more than paying PITI. By the time we closed escrow in May, we finally got renters in our other property and now have the extra cash to put towards the principal on our mortgage if we want. I do understand the point of saving up and putting down 20% and what it might suggest about how risky a buyer is when they are unable to do that. But for our situation, we plan to stay in the house and raise our family, and my husband has a very secure job where he gets annual COL raises in addition to step pay increases. Also, while his coworkers were purchasing brand new houses over double (sometimes triple) what we paid, we opted to buy a foreclosure that cost us only 1.7 times his annual salary. We could have waited to save up the downpayment since we finally got our other property rented, but we were tired of moving from rental to rental as our family grew and wanted to finally settle. We just made sure we didn't over extend ourselves and bought a house with a payment (PITI) that would still keep our overall debt to income ratio below 25%. I know we are probably not in the majority of home buyers right now, but I don't feel like not having the 20% necessarily means we are not ready or responsible enough to buy. I am curious though on what thoughts everybody has on the VA loans and whether they should be offered or not. Cheers!

Totally agree. I noticed this in April: FHA is the new subprime.

Kevin says

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?

If the Federal Reserve tomorrow decides to raise interest rates all these investments can sour very quickly.

I am not saying that buying a house is at all a good investment as housing is clearly way way overpriced. My point is that if you have already made that bad investment putting more money into your mortgage is sound financially. Except of course if you want to walk away.

What I find "bad" about VA loans is two fold:

They raise house prices near military bases

They encourage military to buy when they should rent

When I was in the Air Force, I knew quite a few folks who were stationed at one base while having an unsold home at thier last assignment. Oddly enough, those who couldn't sell the old house buy again at the new assignment. Multiple house payments was almost a proverb. Even though folks knew they would only be on station 3 years, and despite the experience of bringing a checkbook to the closings of old homes that eventually did sell, they still buy.

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.

I don't know where you got that from, but it is inaccurate. 20% is not mandated here, and income v. price was not an issue with many local lenders, either.

We put down 25% (more, actually) on our house in 04. It’s all gone today, plus about 15% more (and still dropping). When we get kicked out of this place (sometime around 2011, I’m guessing), and after the “cleansing” period of 5 years (probably less, as I’m guessing there will be a Great Credit Amnesty, not so much to help us as the banks) I will never put down more than the bare-ass minimum again. If I buy. Not too sure about that either.

With all due respect, the problem has less to do with what you put down, and everything to do with having purchased an overpriced house during the hysteria. The right move would have been to rent.

That said, if you can afford to, why not sit tight? The home is still affording you the same amount of shelter it did when you purchased it.

For example, if you're tired of driving someone else's car, and you decide to buy your own car, for say, 15K putting 5K down - well within your means - only to discover that the car is worth only $8000 eighteen months later, do you walk away from the car if you can still afford it? It still serves its purpose as a means of transport. I know this isn't a perfect analogy, but I do think that people see homes more as an investment than an expense. It is a very useful and expensive apparatus for living. That's about it.

20% sounds fair, I’ll agree to that. Just a few things first, I’d also like to see a return of my: pension plan, career security, my last job returned from India, full employer-provided health & dental insurance, elimination of the 5 “pre-tax” funding deductions on my pay-check, the ability of my wife to stay at home and avoid child care, reduction or the $10k + 3K I pay a year in property taxes and HA diues…and a few other things like the answer to why my utilities bill is $450+ a month even though I have an “energy-efficient” new home.
The pont is: everything has changed. The average guy’s financial condition and security has been under attack from every conceivable direction, to go back to a 20% mentality and ignore everything else is intellecutally dishonest and talk show silliness.

I understand your stance on overall diminishing returns. However, this is really not a very good argument for moving the goal posts. You would be more able to swing 20% if the prices weren't pegged as they are, for these minimum down grub stake loans. If you still could not, you would rent and save.

I don’t see any reason to be heaping scorn on the 3% down payment at all. Here is my take - To the extent that they are first time home buyers who qualify based on documented income and the criteria of a monthly payment being between 30% - 38% of their household income and the loan is NOT an interest only loan, I would think that it would be acceptable, given the low home prices at this time, which are expected to recover in the next 5 years. Now is the time to encourage all those exotic financing schemes really and NOT when the home prices start to go up! All those exotic financing schemes should be choked off as prices start moving up and they go above the historic Household income-Home price co-relation trend levels!

It's not so much scorn, as dismay. Meanwhile, your supplied logic is errant, as the criteria is not a stringent as the one you've put forth. Example: one guy I know is in-between jobs as he pays on escrow toward that 3% down. The property is also priced well over 3Xs their annual income. FHA is designed to make it easier for riskier buyers to get a loan. It almost proclaims it's laxness as its #1 benefit. Also, I can supply plenty of examples of houses that are still overpriced by margins of 20 and 30%, including many in the hotbeds of the bubble era.

m1ckey6 says

Gotta love the Kevin’s of this world. Sneering certainty in financial matters is a sure fire guarantee the speaker has no idea what they are talking about.

Despite the absurdity of claiming a positive return from Vanguard small cap investment’s since late 2007 I do - unfortunately for Kevin - know where the market was 40 years ago.

The S&P was at 99.61 in July 1961. Adjusting for inflation using BLS data we get 585.43. Today we are at 943.72 which is a 1.2% compound rate of return.

Aside from the fact that the compound return rate dropped over three points due to last year alone, you're ignoring the 3-5% dividend yield.

The funny thing about last year's drop is that it is the third drop of such a size in 100 years, the other two being 1974 and 1934. In both of those cases the losses eventually turned into a blip on the radar. Depending on when you pick your numbers, the annualized return rate can easily go from -6% (the last 10 years) to 14% (the 1990s).

10 years from now, the annualized return on growth alone will measure 5-6% again, adjusted for inflation, and there will still be 3% dividend yields on top of that.

You are being lied to by your “financial advisor”. Vanguard’s small cap ETF VB is down 37% since you said you bought it. This means you need a further rally of 59% simply to break even.
Most people struggle with basic math which is why Wall Street pulls so much money out of people’s pockets every year. Kevin is the classic type that “wins” $1,000 when he visits Vegas but forgets to mention that he started with $2,000.

I bought the fund in January, not in late 2007. 2007 is when I converted everything to bonds. The bond funds were worth a little under $30k in december 2007, and a little over that in January 2009 when i sold and converted back to stocks. The account currently stands at a value of a little over $40k.

But clearly they focused on math instead of reading comprehension at your school.

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!

Madoff

Kevin said:

"I bought the fund in January, not in late 2007. 2007 is when I converted everything to bonds. The bond funds were worth a little under $30k in december 2007, and a little over that in January 2009 when i sold and converted back to stocks. The account currently stands at a value of a little over $40k.

But clearly they focused on math instead of reading comprehension at your school."

Not to be flippant Kevin but I'm not sure it even matters to have an opinion on financial matters if your savings are $40k. If you are 21 then congrats but ROI on this amount is a little like being the best at pedal car racing - irrelevant.
Once you get an amount that is more than a years dedicated savings lets have a discussion about strategy.

Austinhousingbubble says

The property is also priced well over 3Xs their annual income. FHA is designed to make it easier for riskier buyers to get a loan. It almost proclaims it’s laxness as its #1 benefit. Also, I can supply plenty of examples of houses that are still overpriced by margins of 20 and 30%, including many in the hotbeds of the bubble era.

I don't think FHA is considering 3X Annual Income. They maybe considering only if the monthly payment is within the band of 31% - 38% of their monthly income. I see no reason why riskier buyers should not be given a loan.

I think right now its a dumb idea to put any money down. If you need to dump money to lower your payment you probably can't afford the house (remember when a person's income determined what house they bought?), and in this kind of a market I'd be looking to float the whole loan, thereby making it SOOO much easier when I had to walk away 5 years from now when it had dropped another 50%.

whitneyross says

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.

As a person who bought a home in Texas in 2008 using only a 10% down payment, I can definitely say that this statement of yours is pure BS. The reason Texas did not experience the Housing bubble is due to the easy Home Building regulations (or rather Non-regulations) that allows unrestricted building of homes, so there is plenty of supply ALWAYS!

If you need to dump money to lower your payment you probably can’t afford the house (remember when a person’s income determined what house they bought?), and in this kind of a market I’d be looking to float the whole loan, thereby making it SOOO much easier when I had to walk away 5 years from now when it had dropped another 50%.

It's not about needing to, it's about wanting to -- as in wanting a shorter stint over the barrel. If you could buy a house, (at fair market value - meaning not RIGHT NOW) and pay it off completely, why wouldn't you? So you can nickel & dime yourself for the next 20 - 30 years while playing grab ass in the stock market, only to lose a nice chunk during the next crash - which might just be nicely timed to coincide with your autumn years, as it was with many friends I know. Also, with a vastly diminished monthly/yearly overhead along with any pay raises/promotions you may enjoy now in your prime earning years, you have that much more spending power for investments.
As for going into a deal with the idea of walking away -- if that 'fuck-it' attitude takes hold, it iis going to destroy the landscape. It will be what this generation is reviled for thirty years hence, much as the baby boomers are for their materialism. If there's even a shadow of a doubt in your mind that you might 'walk away' you should be horse-whipped for even thinking of buying. It's like getting married to a woman who you might not be totally in love with, with divorce somewhere in the back of your mind on your big day.
And frankly, who wants to live in a neighborhood full of people who feel so flippant about their residences? Sounds like trouble to me.

Texas is not a “walk away” state … and THAT, along with strick rules for lending to non-Americans, is why there was not as bad of a bubble. Lets all be open and honest as we go - k?

IF by not a "walk away" state, you mean you can't mail in your keys and go live with mom & dad, I think you're wrong. There are non-recourse loans here in Texas, too. Check it out:
http://www.foreclosure.com/statelaw_TX.html

AHB, I dont think many truly understand what is going to happen to these recently developed regions.

It's true; or rather, they have at least some idea of what's brewing, (given recent events, and the law of averages, how could you not?), but cognitive dissonance and 3% down emboldens their bad decision making.

It's like being at the store with a grocery list, then realizing you don't have your wallet on you, and deciding to go about filling up your cart all the same - because you're already there, dammit, and you have all these great coupons in your pocket.

Texas also has relatively higher property taxes than California (as well as no Prop 13-type caps). This also contributes to the relatively smaller bubble (or non-bubble) in Texas than California.

If by non-bubble, you mean no hyper-appreciation, (70-100% in four years in some areas) you are dead wrong. At least in Central TX. The numbers don't lie.

About the TX thing and VA loans, I know quite a bit. Rental property in Dallas and just sold in Corpus Christi.
The 20 percent thing is probably the rule about home equity loans. You cannot borrow beyond the 80 percent LTV, that is you must leave 20 percent equity in your home if you take out a home equity loan.
The canal homes on North Padre Island have been pummeled by almost 40-50 percent from highs in 2006-2007.
We sold in Jan of 2009 and of five other people at my wife's place of employment--a hospital--none have had any luck selling for the past six months. We were the last ones to "get out." Prices, especially in the more exclusive areas, have been pummeled by more than 20-30 percent from the highs of 2005. This is TX where there was no "bubble." Our builder went out of business almost two years ago and is now tending a bar. We had a dry lot on North Padre and just barely avoided a loss.
My father recently viewed a few area homes and a listing agent, who insisted that the home was correctly valued, bemoaned "if only there were more buyers." Of course she must also know that price has no relation to supply and demand. We have friends, listing their elegant home aggressively 50k below market (yes, below comparables in their neighborhood), which is almost 100k less than the purchase price in early 2006, with no takers for months. And they need to sell asap. Roughly a 350k house now for 250k. If it's desperate in TX, it's desperate.
Check out the sanguine perspective of this local real estate agent from Corpus Christi. She avers that home prices will pick up by Dec. 2009. I can assure you that there is so much available inventory in that market, there is no chance that the 8k home stimulus will do squat, especially at the middle to higher end. If Corpus Christi, as she contends, has one of the strongest housing markets in the country, then we can extrapolate from there: down.
http://www.donnanell.com/
Speaking of VA loans. We had two offers on our house--all of our neighbors with homes to sell were astonished...one was a VA loan offer that was tweaked very much in favor of buyer...yes VA always favors to protect buyer but you can hide additional fees for seller to pay by using and open clause for unspecified expenses. VA loans need to be written well to at all be competitive to conventional. we took the latter.
We will use VA in future, especially in military community with streamline refinance and assumable loan rate.
I'll just add two other bits. Why did our house sell? We listed it with a flat fee agency for 299 and 3 percent to buyer agent on MLS. Their buyers agent was a guru. The other agent was an ESL sap plus VA. Always deal with the agent who you think can get the deal done. He talked them right in, especially with a second "competing" offer. I believe the buyer had to add a few k bc of lower appraisal btw. BAgent asks me when deal is done, so how much did you pay for listing..."299" and his mouth dropped. Gotcha. Had we paid listing fee, we would have made almost nothing.

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.

Alas you are probably right in your assessment that most fall under option 2, however I as a potential buyer fall into category 1 because of your concern as stated in option 3.

(If I ever get to the point where) I could put 20% down, I would have no money in reserve in the event I have an emergency repair, loose a job, get ill, etc. So, I will choose to put 3.5% down, and keep the cash in the bank for emergencies.

Also, it depends on the market you are in. Saving 20% on a 150k house will take less time than saving 20% on a $400k house, even when you adjust for incomes and other cost of living factors.

As far as my own personal situation, typical house is $350k. 20% is $60k plus another $10k in closing costs. So I would need $70k in the bank just to buy applying the 20% rule of thumb.

EastCoastBubbleBoy says

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.

or:

Buyer is merely able to spend more on a home, even if not financialy prudent. The idea that the average homeowner can invest at higher return than his mortgage payment is a figment of the imagination of the homeowner and his "financial advisor."

No, not a troll.

I need to qualify my statement about %26 return, its more:

1) I am lock in employee stock purchase plan that, as of Friday, is yielding 60%.
2) I gambled my wife's 401k early this year, split it between 3 stocks, and doubled it.

I realize this isn't sustainable and some dumb luck, but right now my investments are paying. My point is why is it necessary to put 20% down if I don't have to and do not over extend?