patrick.net

Classic patrick.net.

If it would take a buyer 14 years to pay only 20% (one fifth) of the purchase price, it would take five times as long to pay it all off, or 70 years!

Good catch. Longer, if you figure in interest.

Your chance of getting a reasonably priced house depends on stopping the criminally insane lending that realtors are lobbying to continue.

The insane lending has stopped, Patrick. Which is part of the reason housing is going lower.

NAR is now the vox clamantis in deserto (voice crying in the wilderness).

Like you used to be.

Ultimately, what we need is to get Fannie and Freddie to be smaller and encourage private lenders to lend again. Private lenders have historically found 20% down, traditional 30-year fixed mortgages with 28/36 ratios to have predictable default rates, whereas other "affordability products" don't always work out so well. Even *traditional* subprime (i.e. B-paper/C-paper) has a predictable default rate, but not the kind of subprime products that were sold during the boom (Option ARMs, Alt-A, etc.). We need to get the banksters in the boring business of banking, rather than the scam-artist business of creating financial "innovations" that really just fleece the public.

Sean7593 says

The insane lending has stopped, Patrick. Which is part of the reason housing is going lower.

Insane lending has lessened, but not stopped. We still have 3%-downpayment FHA mortgages and a slew of other ways for borrowers to get into deep trouble, at taxpayer expense.

The NAR itself brags about how it can corrupt our laws to benefit realtors:

http://www.realtor.org/realtororg.nsf/pages/AboutUsLobbying

Of course they don't call it "corruption". They call it "federal legislative objectives".

Insane lending has lessened, but not stopped. We still have 3%-downpayment FHA mortgages...

Yes, I'm looking into one of those, myself. Though I can afford to put down 50 percent (been saving for over 10 years).

But I know what you mean.

The NAR itself brags about how it can corrupt our laws to benefit realtors:

http://www.realtor.org/realtororg.nsf/pages/AboutUsLobbying

Of course they don’t call it “corruption”. They call it “federal legislative objectives”.

It's not fair and it's not fair that it's not fair.

I am writing in support of the QRM proposal, per your suggestion. FWIW.

Thanks, as always.

If it would take a buyer 14 years to pay only 20% (one fifth) of the purchase price, it would take five times as long to pay it all off, and that’s 70 years!

It may take them 70 additional years to _save up_ enough to buy the house outright at that rate, but if they get a mortgage to buy the house (that presumably they can live in), then they stop paying rent on the old place...I guess it depends on many unknowable factors but I doubt they would have a 70 year mortgage...Who knows, maybe their monthly housing payment gets cut in half.

it would take five times as long to pay it all off, and that’s 70 years!

Sean7593 says

Good catch. Longer, if you figure in interest.

Actually, this is utterly wrong. People saving for a house have to pay RENT.

i'd be all for max 80% LTV if, and ONLY if, non-owner-occupied SFH and condos had a confiscatory rent tax.

Anything less just pushes supply away from families and to the parasitical specuvestors that are already nearly monopolizing the market in many segments and areas.

Troy says

People saving for a house have to pay RENT.

True, but people who have a mortgage have to pay rent on the money they borrowed (that rent is called "interest").

We still have 3%-downpayment FHA mortgages

There's nothing wrong with 3% down. Hell, there's nothing wrong with 0% down.

The important thing is that SUSTAINABLE lending programs remain in force.

As long as the system doesn't find interest rates rising faster than real disposable incomes, the current system is in fact sustainable.

What made the 2001-2007 market unsustainable was not the 0% down but rather the LIAR loans and pay-option / negative amortization / teaser-rate loans that roped borrowers into a temporary affordability bubble but required APPRECIATION to bail them out.

This is obvious, no?

A well-underwritten 0% down loan doesn't require appreciation, in fact, as the payments proceed the loan becomes more affordable.

Unless, of course, the macro economy resumes sliding down the drain and/or disposable incomes come under pressure due to large tax hikes.

deleted due to my confusion.

But when you buy a house with 0% (or similar) down, then you do pay rent -- on the money you borrowed.

but people who have a mortgage have to pay rent on the money they borrowed (that rent is called “interest”).

After-tax interest rates are well under 5% now -- closer to 3% -- for moderately high-income households that can take advantage of the MID.

A condo with a standard of living equivalent to my apt runs around $330k now. PITI (less taxes) with 3.5% down is $1900/mo, and let's say the MID covers taxes and maintenance.

20% down payment is $66,000 and 3.5% down is $12,000, over 5X the difference.

Right now rents are around $1500/mo, so a household able to pay that and also save $1000/mo towards a home will be able to buy after 1 year at 3.5% and 5 years for a 20% loan.

That's 4 years -- $72,000 on rent -- saving the bigger nut.

But the buying after 1 year at 3.5% case shows that in 2016 -- after another 4 years of paying down the mortgage -- the buyer will be sitting on ~$30,000 in equity (assuming the market stays flat) and have ~$30,000 in savings (the $600/mo less housing cost he enjoys for 4 years after buying compared to renting and saving for the 20% DP).

With a 20% DP he'll have $66,000 in equity and no extra savings, so by these numbers the buying option @ 3.5% down costs $6000 extra over the first 5 years, or $100/mo, $100/mo the LL will very gladly take if the housing market tightens up from here.

In addition, the 20% downpayment will be effectively locked-in into earning him 3% or so in less interest costs until the loan is paid off.

This 3% is a beatable nominal yield I think, depends on the macro. If interest rates are moving up then probably wages are too, so e.g. having only 3.5% tied up in the house should prove a better investment strategy when 3 month treasury bills are earning 5%, like they were in 2006.

The above number ($1900/mo) was also factoring in $300 mo PMI. Once the PMI is removed from the 3.5% loan the buyer will see another $300/mo in income, which is equivalent to a full 5% yield on a $66,000 downpayment that he didn't have to make.

"A well-underwritten 0% down loan doesn’t require appreciation, in fact, as the payments proceed the loan becomes more affordable."

Isn't 0% down basically like renting for an extended period of time? As Patrick said earlier, it's just renting at the interest rate. On a 30-year fixed, it takes 10 years to accumulate 20% equity when you put 0% down.

Taking a 0% loan doesn't always make good financial sense either, especially somewhere where buying is more expensive than renting like the Bay Area. Why should you take the attendant risks in buying property when you'd probably be better off financially renting? You could offload risk onto a landlord, pay cheaper rent to the landlord (instead of more expensive rent to the bank), and save the extra cash. Obviously, finance isn't the only concern when buying a house, but I'm just emphasizing that people don't consider it enough.

People who "bought" houses with IO loans were also renting; they just didn't realize it.

corntrollio says

On a 30-year fixed, it takes 10 years to accumulate 20% equity when you put 0% down.

P&I on a $330,000 home with 3.5% down is $1630 with a 4.5% loan.

Interest, PMI, and taxes are $1200/mo once the $650/mo tax credit is applied. There is ~$400/mo in other expense -- HOA, maintenance accrual, insurance, so that's why that buying at 3.5% down is about $100/mo more than renting at $1500. As the loan is paid down, more money pays off principal. After 10 years, around $700/mo of the P&I is going towards principal. Will rents be $700/mo less in 2021?

corntrollio says

Isn’t 0% down basically like renting for an extended period of time?

Buying is obviously taking a call option on area wage inflation. If the bet doesn’t work (ie the Great Recession returns with a vengeance), you can just give the keys back to the bank, especially in non-recourse states.

One of the key metrics I use is average TCO over the life of the loan.

For $330,000 home, 3.5% down, 4.5% 30 year:

Total Interest Paid: $300,000 -- less $100,000 tax credit -- $200,000 -- $540/mo
Property tax: $125,000 -- less $45,000 tax credit -- $80,000 -- $220/mo
Total other: $125,000 -- $350/mo

So the average cost of ownership over the 30 years is around $1100/mo.

This is substantially less than the $1500/mo rent of today, let alone what rents will be in 2020 or 2030.

O/T but, I like the new format. makes more sense

Those b@st@rd$.

Troy says

There’s nothing wrong with 3% down. Hell, there’s nothing wrong with 0% down.

Even for you, that's a pretty dumb comment. Their probability of default is almost 100% correlated with the amount of skin they have in the game.

Absolutely true, Patrick! Anything less than 20% or 30% is just pure speculation and debt surfdom enablement on the backs of taxpayers. Just say No to NAR leaches and have them disbanded.

The Atlantic gave a good breakdown of the assumptions behind the "14 years to save 20% down" figure.

http://www.theatlantic.com/business/archive/2011/04/will-20-down-require-waiting-14-years-to-buy-a-home/237155/

If there are fewer buyers because credit is further restricted, wouldn't that push prices down, thereby lessening the time it would take to save a downpayment on a "median priced home"?

@Their probability of default is almost 100% correlated with the amount of skin they have in the game.

I covered this in detail on another post...

http://patrick.net/?p=29220

It amazes me, that you still believe that more regulations will solve the problem. Why should they stop "insane lending" with 0-3% down if the G backstop their losses? Remove Gov guarantees and downpayment will go back to 20-30% or whatever a private lender demands. Get Gov't out of real estate and lending completely. It's the only solution.

I never said I believe that more regulations will solve the problem. I agree that the government should get entirely out of lending.

Ok, anyone who has read my comments knows I am housing bearish. However, I have bought in the past with (I think it was) 5% down and I did not default, it was not a problem at all except I had to pay PMI. The (I think it is) 3.5% minimum with FHA is not in and of itself evil and wrong. It's a choice and does not necessary create a wave of defaults.

Of course, when I did it, it was on a $73k mortgage. The low down was just a way for me to keep my limited extra cash in the bank, since the payment was well within reach anyway. I paid the house off, no problem.

Troy says

One of the key metrics I use is average TCO over the life of the loan.

For $330,000 home, 3.5% down, 4.5% 30 year

The American family moves on average every seven years. I could counter your example with my own broad-brush calculation of how financially stupid it would be if someone were to buy today and sell in one year and make just as valid a point.

At the absolute minimum, the down payment needs to be enough to cover the closing costs of re-selling the place.

For instance, if I buy a place, and then lose my job the next day, I should at least have enough equity (down payment, now lost) to sell the place.

Otherwise I have to go to a loan shark to sell a place I just bought last week?

Let not your heart be troubled, Pat. I don't think, even under federal pressure, most banks have the appetite for 0% down. It's like someone asking you to put your hand back on the stove while you are still shreiking "ouch hot hot owwww!!!"

klarek says

Troy says

One of the key metrics I use is average TCO over the life of the loan.
For $330,000 home, 3.5% down, 4.5% 30 year

The American family moves on average every seven years. I could counter your example with my own broad-brush calculation of how financially stupid it would be if someone were to buy today and sell in one year and make just as valid a point.

Right on. You have to wait 30 years to see all the investment pay off? Screw it. Troy, if you are talking 30 years then factor in 2 severe down turn in that period and values comes down to 20% to 30% and you have made hardly any money even after 30 years of owning.

klarek says

Their probability of default is almost 100% correlated with the amount of skin they have in the game.

Nope. Non-recourse makes "skin in the game" a sunk cost.

Default losses come from the market falling after purchase. The instability of the current economy comes largely from loss of jobs, but aside from that housing is generally stable in nominal if not real terms, and will continue to be as long as effective mortgage interest rates (including any tax benefits) do not rise more than wages.

What caused the massive wave of defaults 2008-now was simply the suicide lending of 2002-2006 that roped buyers into loans they could in no way repay -- accomplished by the newly widespread availability temporary boosts in consumer buying power via negative-amortization and teaser-rate financing, plus stated-income to avoid traditional DTI limits.

80/20 and Zero down was a very minor part of this price escalation dynamic. It brought more buyers into the market, and provided a pressure on prices, but it was the actual abandonment of solid underwriting that enabled prices to zoom past what the market could reasonably sustain.

Troy says

What caused the massive wave of defaults 2008-now was simply the suicide lending of 2002-2006 that roped buyers into loans they could in no way repay

Well, "roped in" I don't know, they were pretty willing. But anyway, even the loan products of ARM, no-doc, etc would have been a lot less of a problem if not for the massive price bubble that it helped inflate. That fact that people were "buying" houses for $1 million with NO MONEY down and not even a payment to cover the monthly (neg-am) is to me the key point of this sordid tale.

klarek says

The American family moves on average every seven years. I could counter your example with my own broad-brush calculation of how financially stupid it would be if someone were to buy today and sell in one year and make just as valid a point.

I agree that transaction costs are missing from my analysis, yes. I'm doing these comparisons for me, and I don't intend on moving once I buy.

Taking a 10% transaction hit every seven years would easily eliminate the current advantage of buying.

pkowen says

That fact that people were “buying” houses for $1 million with NO MONEY down and not even a payment to cover the monthly (neg-am) is to me the key point of this sordid tale.

I'm arguing the NO MONEY DOWN part did not serve to push homes past the price of long-term affordability.

It was negative-am and the other loan products that have been forcibly withdrawn from the market that was the primary inducer of the valuation bubble, since these products had a built-in time bomb that required borrowers to sell or convert equity to cash via HELOC to continue paying the loan.

NO MONEY DOWN brought more buyers into the market, but that was sustainable as long as the NO MONEY DOWN conditions remained since there was & is no inherent time-bomb involved with 80/20 or low down payments.

The bigger problem 2004-2007 was that the housing bubble was directly and indirectly funding millions of jobs in the US.

That was the core macro-economic sin.

http://research.stlouisfed.org/fred2/graph/?g=x3

The red line is YOY growth in home valuations, the blue line is YOY growth in home debt.

$1.3T of net new debt hit the wider economy in 2006, this was the same amount of stimulus as our current insane gov't spending deficit -- we've just substituted the latter for the former, really.

bubblesitter says

You have to wait 30 years to see all the investment pay off?

Nope. I did the numbers for you:

For $330,000 home, 3.5% down, 4.5% 30 year:

Total Interest Paid: $300,000 — less $100,000 tax credit — $200,000 — $540/mo
Property tax: $125,000 — less $45,000 tax credit — $80,000 — $220/mo
Total other: $125,000 — $350/mo

The 30-year TCO of that condo will be about $400,000, that works out to ~$1100/mo.

If we add in four $30,000 moves that would bring the average TCO to $1400/mo.

Rents right now for this condo are $1100-$1500. The important thing to account for is that the condo cost of living is largely locked-in due to the fixed interest rate and Prop 13.

Now, there are all kinds of variables going on with future interest rates, job growth (or lack thereof), etc. but these numbers just focus on a ceteris paribus buy-vs-rent analysis.

The real question is where do you see rents going in the future. Rents have doubled since 1991, and they'll probably double again in the next 20 years.

Buying now does have the virtue of locking in your housing cost of living to today's situation.

If things get worse from here it will prove to be a mistake, if things get better, it won't.

DrKnowNothing says

At the absolute minimum, the down payment needs to be enough to cover the closing costs of re-selling the place.

That was pre-paid when the place was bought -- in a non-declining market the buyer is the one bringing all the cash to the closing table, not the seller.

This entire thread points out what a #(*&%#(%* game has been made out of buying houses. "Have fun" those who are playing. Looks like a big stress and pain.

The amount of money on the line makes big purchases very unpleasant. Wouldn't it be great if a car showroom or a realtor gave the same level of service as a hair salon? A little back massage, a magazine to read, some good coffee, and some TV maybe? Seems the least they could do given you're about to shell out tens of thousands of dollars.

Troy says

Nope. Non-recourse makes “skin in the game” a sunk cost.

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

Troy says

What caused the massive wave of defaults 2008-now was simply the suicide lending of 2002-2006 that roped buyers into loans they could in no way repay — accomplished by the newly widespread availability temporary boosts in consumer buying power via negative-amortization and teaser-rate financing, plus stated-income to avoid traditional DTI limits.

That was the trigger, but it wasn't the entire factor. If all those people were getting the exact same terrible loans EXCEPT with 20% DP required, the bubble would not have existed, or at least to a marginal amount, and barely anybody would be underwater by comparison.

Troy says

80/20 and Zero down was a very minor part of this price escalation dynamic. It brought more buyers into the market, and provided a pressure on prices, but it was the actual abandonment of solid underwriting that enabled prices to zoom past what the market could reasonably sustain.

Again, none of that would have happened were there stringent down payment requirements. 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. Those who did buy in would have bought at far lower prices, and when their ARMs did blow up, they could - by a large comparison to what actually happened - refinance into a normal loan or simply sell the property. This is not an argument of "no DP was the whole problem", but it alone could have completely prevented this storm from happening. Hence, I think your comment above about how 0% down isn't a problem is fundamentally untrue. The closer you get to zero down, the probability of default becomes exponentially higher. Hence all those people buying in 2007, 2008, and 2009 after the insane subprime market ended are STILL being foreclosed upon, and in increasing numbers.

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:

since move-up sellers from the 1980s and 1990s could roll over their equity and capital gains gains to cover the DP requirement.

Texas avoided the bubble by limiting HELOCs to 50% LTV, starting in 2003. That was smart and very good timing.

I think it wasn't so much the low downpayment but the high cash-out nature of housing that was feeding the bubble and driving the larger economy, 2003-2007.

The closer you get to zero down, the probability of default becomes exponentially higher.

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

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

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.

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.