patrick.net

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

.
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

.
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

.
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.

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.