patrick.net

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.

Troy says

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

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

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

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

klarek says

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Downward forces on housing prices are not preventable

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

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

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

Troy says

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

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

Troy says

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

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

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

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

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

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

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

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

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

So I guess thanks NAR, but no thanks.

ih8alameda2 says

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

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

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

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

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

corntrollio says

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

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

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

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

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

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

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

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

we are facing if this is still a down market.

E-man says

NAR is doing 1st time home buyers a favor

Helping to inflate home prices does no one any favors.

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

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

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

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

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

APOCALYPSEFUCK says

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

You're such a softy!

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

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

@Katy Perry

Welcome to Japan!

E-man says

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

I like your sense of humor.

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

RealisticOptimist says

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

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

RealisticOptimist says

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

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

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

newbie says

When prices go down, more people will buy.

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

klarek says

RealisticOptimist says

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

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

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

newbie says

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

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

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

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

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

HousingWatcher says

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

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