Thursday, April 26, 2012

Interesting Fact of the Day

In 1989, only 1 in 230 homebuyers bought a house with a down payment of 3% or less.  In 2003, the ratio was 1 in 7.  By 2007, it was 1 in 3.


22 Comments:

At 4/26/2012 11:10 PM, Blogger kmg said...

So what is it now, as of 2011?

Unless we get back to the 1989 levels, the unwinding has not truly completed.

 
At 4/27/2012 2:31 AM, Blogger PeakTrader said...

It's a bubble only if it bursts.

When the ratio increased to 1 in 7 in 2003 and lending standards began to gradually tighten, at that point, the financial crisis and severe recession would've been avoided.

The housing bubble would've looked more like this:

http://research.stlouisfed.org/fred2/series/COSTHPI

Than this:

http://research.stlouisfed.org/fred2/series/NVSTHPI

There would've been fewer idle resources, in a milder recession, and more homebuilding (e.g. more workers buying a second house).

 
At 4/27/2012 5:18 AM, Blogger Larry G said...

there was a time not too long ago when if you did not have a 20% down payment, you were forced into getting MGIC to cover the lenders "risk".

Not sure what that's still not a good idea.

 
At 4/27/2012 5:41 AM, Blogger Abir Mandal said...

It's not a good idea because it's the government's responsibility to ensure affordable housing for all.

 
At 4/27/2012 6:32 AM, Blogger PBC said...

The government is doing the same to student loans as it has done to the housing market. A massive education bubble is being created through cheap loans that is inflating the cost of education. University presidents are operating like real estate agents and mortgage lenders during the housing bubble. Everyone focuses on loans and interest rates and ignores its effect on price and overall debt. Then the reckoning hits...

 
At 4/27/2012 7:04 AM, Blogger Moe said...

I'm reminded of the "pig in the python" analogy. As my generation has moved through society the stock market, housing market, education, financial system and now health care have and are undergoing tremendous upheaval.

 
At 4/27/2012 9:02 AM, Blogger morganovich said...

the stat i found really interesting in that is that the average us homeowner only has 7% equity, down from 45% in 1990.

this is a seriously pivotal issue in terms of housing affordability. there is a great deal of talk about how cheap houses are in terms of price and mortgage carrying costs, but the size of required down payments has gone way up.

10% is a minimum, 20% is common.

if the average equity in homes is 7%, then the average buyer needs to go money in to the tune of 3-13% to make a downpayment on a new home.

this is the hard part of the purchase (well, that and getting a loan at all right now).

payments may have become really affordable, but the huge drop in the value of the currency you use to buy (your old house) has made houses a great deal more expensive as well and even first time buyers face much greater entry costs as downpayments for them are going to be 20% instead of zero down.

 
At 4/27/2012 9:20 AM, Blogger AIG said...

Well Morganovich, then don't buy houses. Nothing wrong with the market saying: buying a house isn't for everyone.

I don't know where, or when, they got this idea that the "American dream", is owning a home.

 
At 4/27/2012 9:33 AM, Blogger Moe said...

AIG - ask Monica Lewinsky

 
At 4/27/2012 10:40 AM, Blogger morganovich said...

aig-

oh, i agree.

the us pushes homeownership far too hard. encouraging people to make huge, heavily levered purchases is a very questionable policy.

my point was not that everyone should get a home, my point was that the current "affordability" of homes that gets discussed so frequently based on dropping prices and low rates is not the whole picture.

the reason home sales volumes are not responding to that "cheapness" is that you first have to get over the down payment hurdle and based on that, housing has actually gotten a great deal less affordable.

 
At 4/27/2012 10:40 AM, Blogger Ken said...

AIG,

I don't know where, or when, they got this idea that the "American dream", is owning a home.

I always thought this was funny, too. The American dream: owning a house in the suburbs with 2.2 kids and a white picket fence. It does sound nice, but the American dream is having the freedom to pursue your own happiness; it's an individual who decides what the American dream is for himself.

Owning a home ties you to an area. This being tied to one area is one of the things I think has been causing slow recoveries the last two recessions. If you have more than 20% equity in your house, selling it isn't so bad. But if you only have 5% equity in the house, you'll have to show up at closing with money (depending on the cost of you house this could be tens of thousands of dollars). In other words, owning a home can be a nightmare, instead of a dream.

 
At 4/27/2012 11:08 AM, Blogger Its GSATT said...

Ken, I think your on to something with the fact that people are glued to their pieces of property while weathering this recession. People have to foreclose their house to get out of their area to chase a paycheck.

I've been renting for quite some time now because I just cannot get myself to see a benefit in solidifying my existence to one town. I'm a relatively recent college grad and have not been able to get myself into the aviation sector yet, and with the volatility of the business of flying planes, I don't ever think I will own a house. And with this legislation proposing a $100 fee for each flight, it's going to be even harder to find an airline that wont go bankrupt after a few years.

 
At 4/27/2012 11:17 AM, Blogger Methinks said...

Morganoivich,

Maybe it's less affordable than when people were able to rent-to-own, but historically, a 20% downpayment was the norm.

That was the price of the walk-away option and that option was given away virtually for free in the first half of the last decade when zero-down became the rage.

I doubt you'd argue with that, I'm throwing that in. People weren't paying the full cost before.

Ken,

I'm sure it's not the only reason, but politicians love home buying. Home owners are stuck. They are (as you point out) long an illiquid asset and short the option to move about quickly. For this reason, homeowners tend to favour political incumbents. It's the "devil you know" thing. That's good for the incumbents, who will push homeownership to keep that advantage.

 
At 4/27/2012 11:28 AM, Blogger morganovich said...

methinks-

oh, i agree.

housing used to have much higher down-payments, and clearly, the 2000-2007 period had some very irrational pricing. i'm not trying to hold it up as a norm, just trying to explain why home sales have not recovered despite such dramatic drops in price and monthly payments.

one sees a lot of press about how "affordable" housing is right now, but i do not think that is that case at all.

also keep in mind that average home equity was 45% in 1990, plenty of equity to make new down payment, but now it is only 7%, which is going to require serious cash in to buy a new home. this makes housing for the average buyer much less affordable now than then despite the % for downpayment being the same.

 
At 4/27/2012 11:35 AM, Blogger VangelV said...

It's not a good idea because it's the government's responsibility to ensure affordable housing for all.

Is it? The government doesn't try to ensure that there is affordable food for all. And the market still provides calories at such low costs that your poor are dying from obesity.

 
At 4/27/2012 11:59 AM, Blogger Methinks said...

Agree completely, Morganovich.

Vange, I'm certain Abir was being sarcastic.

 
At 4/27/2012 12:18 PM, Blogger Moe said...

Homeowners have an interest in keeping their property values high and have been shown statistically to have a bias in favor of land-use regulations.

As for homeowners tendency to vote for incumbants; I've never heard that before.(which doesn't mean it isn't true)

 
At 4/27/2012 12:26 PM, Blogger VangelV said...

Agree completely, Morganovich.

Vange, I'm certain Abir was being sarcastic.


I am 99.9% certain that you are right. The problem is when we read some of the comments that have to be sarcastic or ironic we find that they were not meant that way at all. (See Larry, Walt, AIG, Bunny and others on a number of issues.) That is why I try to play everything straight even when it is very likely that the intent is the opposite of what is written.

 
At 4/27/2012 12:29 PM, Blogger Larry G said...

home ownership is common in other countries but the SIZE of the home also has a significant impact on "affordability".

the size of our homes has increased over the years and this also affects "affordability".

LOCATION is also important.

there are a ton of houses available in older neighborhoods that are smaller and not in "best" locations if all you want is your own home.

people buy big houses in the "right" places so they can sell them later if they need/want to.

doing that impacts "affordability".

In my travels of Canada, I note that in many, many places the homes are modest in size and style .

Some places remind me of the 1960's in the US where homes were smaller and more basic.

Every time I drive down the road where I live I count dozens of small and mostly empty homes that no longer are in demand but certainly be functional shelter.

we just want more... right?

 
At 4/27/2012 12:30 PM, Blogger AIG said...

Ken, fully agree. Too many say "oh I would move and get a job elsewhere, but I can't leave my house". Too many. Unfortunately people don't take into account the cost of liquidity, when comparing renting vs owning. Especially when considering that most people, will change their jobs over their lifetime several times, not just when they're young, but well into their careers.

Me, I'm always ready to move in 30 minutes or less, just in case Ze Germans show up.

Of course, then you can't plop out 14 babies by the time you're 30, and get Rick Santorum's Heroine Mother of the Soviet Union medal :p

 
At 4/27/2012 12:32 PM, Blogger Moe said...

AIG

don't mention the war....

 
At 4/27/2012 1:19 PM, Blogger Ken said...

AIG,

Unfortunately people don't take into account the cost of liquidity, when comparing renting vs owning.

I agree with that. I was watching something (HGTV maybe) where a CA real estate agent was saying the big problem with many people buying houses viewed their houses as an investment, rather than a place to raise a family. I hadn't thought of this, but I think this is true as it is very profitable to buy a house with 0% down, then sell if the house value increases by 10% (which was happening).

Since people started viewing housing as an investment, rather than a home, it made more financial sense to have a low down payment. The problem then arose that many people weren't buying houses they wanted where they wanted, but because they thought they'd make a lot of money on them. Well the bubble burst and now a lot of people owe more than their house is worth. To their credit most are actually paying off their house, rather than walk away from the mortgage.

But the fact remains that if they viewed a house as a home, rather than an investment, they would have thought thing through a little more thoroughly buying in a place they want to live and build a life. Instead many tied themselves down to a single location due to what they thought of as an investment opportunity.

 

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