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.