20% down mortages may return as the norm

[theeedude]

We're talking about the government stepping in and TELLING the banks what makes sense.

The government is backing the mortgages through Fannie and Freddie, it can put whatever requirements it wants on those. Banks are still free to give out unbacked loans with whatever downpayments they want, but that downpayment is probably going to be way higher than on a govt backed mortgage.

 

[werepossum]

The government is backing the mortgages through Fannie and Freddie, it can put whatever requirements it wants on those. Banks are still free to give out unbacked loans with whatever downpayments they want, but that downpayment is probably going to be way higher than on a govt backed mortgage.

This is true. Government has a fiduciary responsibility to set the down payment, and all other pertinent conditions like appraisal and industry oversight, sufficient to prevent another round of bail-outs. I know it looks different though to a young person looking at his first house; the inevitable thought must be "Hey, you got yours and I'm stuck paying for it, then you change the rules so that I can't get mine!"

 

[theeedude]

I am a young person looking at a first house and I am thinking, raise downpayment requirement and let the prices stabilize at a lower level, then I'll get mine. Until then I'll take a wait and see approach.

 

[bfdd]

I am a young person looking at a first house and I am thinking, raise downpayment requirement and let the prices stabilize at a lower level, then I'll get mine. Until then I'll take a wait and see approach.

I'm with you.

 

[Jhhnn]

We're talking about the government stepping in and TELLING the banks what makes sense.

Somebody has to do it, because the recent episode of self regulated free market creative financial products shows us that Wall St can't do it themselves... well, other than to serve themselves.

Ride the corporate steed, the stockholders, borrowers, and investors right into the dirt for a few $100M? Crash the economy, too? It's perfectly legal?

There's a waiting line for that job, a very long one...

And unless something is done, we'll just have the guys next in line do the same thing, but I really don't think 20% down is a necessary part of that. 10%? Maybe, but the flimflam of introductory rate short term ARM's for people who have no credit, no jobs, no assets and no chance in hell of making the payments is the real problem here, not fixed rate 30 year mortgages to people with good credit & good jobs for housing they can truly afford.

It'd help if business would actually, you know, hire people and pay good wages rather than sitting on piles of cash to make sure things will get worse...

 

[HendrixFan]

This is true. Government has a fiduciary responsibility to set the down payment, and all other pertinent conditions like appraisal and industry oversight, sufficient to prevent another round of bail-outs. I know it looks different though to a young person looking at his first house; the inevitable thought must be "Hey, you got yours and I'm stuck paying for it, then you change the rules so that I can't get mine!"

If people would do the math, I'm sure many of them will find that "buying" a house with almost nothing down isn't worth it. My rent is $750 a month right now.

If I were to put 10% down on a decent house in the area that would be around $15k. Mortgage payments would be around the same amount, but over $500 a month would be interest for the first couple years, with less than $200 going towards principle. Property tax would be around $3k per year (Texas), or another $250 a month. PMI would run another $1500 or so, so another $120 a month.

All total, I would have to put $15k down to get a small bit of equity, which I don't have to do with an apartment. Closing costs would run around $4k, so my total initial outlay is nearly $20k. My payments, property tax, insurance and PMI would come to around $1100 a month, quite a bit more than the "same" payments for an apartment. Out of that $1100 a month, for the first couple years only $200 or so is going towards equity, the rest just disappears. In fact, it wouldn't be until the 6th year on a 30 year mortgage that more than $200 a month goes towards equity.

After 5 years, I would pay nearly $20k initially then $65k in monthly expenses for a total of $85k out of pocket. I would have just $26k in equity, the other $40k I don't get back. That doesn't include costs of upkeep, which are supposed to be around 1% of the home value per year (another $8k after 5 years).

 

[Darwin333]

So that's what this is really about. People with higher incomes wanting lower prices for housing. Sounds like class warfare to me.

Why do you have a problem with being able to afford more house or being able to purchase a house earlier in life due to their lower cost?

Or do you enjoy not being able to afford a house and probably never being able to afford a house where you live?

 

[Darwin333]

We're talking about the government stepping in and TELLING the banks what makes sense.

You mean it is something like leverage limits imposed by the .gov? Do you think those should be loosened as well? Didn't work out well the last time.

And the .gov doesn't really need to tell the banks shit they just need to set the limits on what they will backstop via .gov or quasi .gov entities. That will automatically set the limit on any loan the banks deem risky, the rest they can eat if they fuck up.

 

[Darwin333]

But my point is it takes time to save more, and during that time you're wasting money on rent when you could be putting it toward the the mortgage.

I realize this forum has a lot of engineers and the like making 6 figures, and for them it's nothing to save up $60k, but for someone at median income, saving money isn't just a matter of choosing not to buy a BMW. It takes time, and that time is better spent paying toward the principle rather than saving pennies for a down payment while renting.

If they can't save up money then why should the lender assume that they will be able to save money to replace the roof and protect the lenders collateral should it be required?

 

[Darwin333]

Somebody has to do it, because the recent episode of self regulated free market creative financial products shows us that Wall St can't do it themselves... well, other than to serve themselves.

Ride the corporate steed, the stockholders, borrowers, and investors right into the dirt for a few $100M? Crash the economy, too? It's perfectly legal?

No it isn't perfectly legal, the laws simply aren't enforced for a select few. I guess its pretty much the same thing but there is a difference.

 

[IHateMyJob2004]

This is simple. You can not just turn around and set some 20% limit. IT SHOULD EXIST!

You have to slowly build up to 20% though. Set a floor at 2% and increase it by 2% every year. This is the only way to fix things.

How on Earth things got so F'ed up is beyond belief. But leaving things as is is stupidity.

 

[Jhhnn]

You mean it is something like leverage limits imposed by the .gov? Do you think those should be loosened as well? Didn't work out well the last time.

And the .gov doesn't really need to tell the banks shit they just need to set the limits on what they will backstop via .gov or quasi .gov entities. That will automatically set the limit on any loan the banks deem risky, the rest they can eat if they fuck up.

But that's not what happened, is it? No. The big risk takers were bailed out. I doubt it'll be any different the next time around, which is why govt must dictate a stronger and safer financial structure. The rewards for extremely risky behavior are simply too large for the execs of the consolidated financial industry not to take them if they can. The damage to the rest of us becomes apparent only after the fact, and they've got theirs already.

Making a criminal case against any of the execs of any of the big Wall St firms would be an extremely difficult if not impossible proposition, given the structure they've been allowed to operate within. Changing that structure is the only real answer, and that's no more likely than successful prosecutions. Repubs and corporate Dems occupy a blocking position wrt real reform, and won't be dislodged unless an unstoppable catastrophe occurs. They're working on keeping that as a real and looming possibility with their whole "deregulated free market" song and dance, because they figure on being on the winning end of it and to Hell with the little guy...

 

[Throckmorton]

If they can't save up money then why should the lender assume that they will be able to save money to replace the roof and protect the lenders collateral should it be required?

It's not about can or can't save. It's about the time. I'm standing by my statement that it makes more sense to buy the house after saving for a couple years for a 5% down payment vs saving for a decade for 20% renting the whole time.

Whether you saved for 10 years or 2 years, you end up saving about the same per month once you're paying the mortgage... it makes no difference. You're saying home buyers need to spend a lot more to "prove" to the bank that they can fix a roof or whatever. Take the money that would have been wasted on the 20% down and 10-20 years saving and use that to fix the damn roof. Once the money is in the house as the down payment it's no longer fungible like if it was cash sitting in the bank.

Look at my calculations earlier in the thread. That $75k extra you spend saving up to prove your "responsibility" will pay for a lot of roof repairs.

 

[DrPizza]

The main problem, at least in my opinion based on not a whole lot of thought, is that a majority of homeowners seem to be looking for the absolute most home that they can afford. That, coupled with close to no down payment, simply drives up the prices for everyone.

I also find it amusing in this thread that on one hand, you're throwing away money when you rent. And, on the other hand, real estate is a very poor investment. Some sort of magic must occur between those two statements.

Regardless, it'll be decades, if ever, that we return to common sense. I'm inclined to think it'll never happen, because society has gone to too much instant gratification. And, most people in society aren't happy with what they have - they need to spend (waste) their money on the newest and latest gadgets. Once upon a time, a family of 4 would have a television in the living room. *Maybe* a 2nd black and white television in a bedroom. Now, their kids have to have 42" LCD televisions in their bedrooms, xboxes, playstations, every kid needs a smart phone, let's not forget the Ipad - oh wait, sell it and get the Ipad 2, and so on and so on.

No wonder there's so much resistance to saving money.

 

[charrison]

It's not about can or can't save. It's about the time. I'm standing by my statement that it makes more sense to buy the house after saving for a couple years for a 5% down payment vs saving for a decade for 20% renting the whole time.

There is truth to this. Low down payment loans should be kept available those with good credit, income histories who a purchasing something well within their means to pay for.

 

[Regs]

No wonder there's so much resistance to saving money.

There are many reasons, which are cyclic in nature, that causes the demand-pull inflation of which you speak of. One of which is the money supply. Average and medium incomes have increased since older generations causing more money to chase the same amount of supplied goods. I agree consumer behavior plays a big part in today's economic tides. Though it sometimes becomes a question of what came first, the chicken or the egg? If your father or grandfather had it so easy to secure a loan and leverage others money to fund their own standard of living, would they have taken it?

 

[Doppel]

If people would do the math, I'm sure many of them will find that "buying" a house with almost nothing down isn't worth it. My rent is $750 a month right now.

If I were to put 10% down on a decent house in the area that would be around $15k. Mortgage payments would be around the same amount, but over $500 a month would be interest for the first couple years, with less than $200 going towards principle. Property tax would be around $3k per year (Texas), or another $250 a month. PMI would run another $1500 or so, so another $120 a month.

All total, I would have to put $15k down to get a small bit of equity, which I don't have to do with an apartment. Closing costs would run around $4k, so my total initial outlay is nearly $20k. My payments, property tax, insurance and PMI would come to around $1100 a month, quite a bit more than the "same" payments for an apartment. Out of that $1100 a month, for the first couple years only $200 or so is going towards equity, the rest just disappears. In fact, it wouldn't be until the 6th year on a 30 year mortgage that more than $200 a month goes towards equity.

After 5 years, I would pay nearly $20k initially then $65k in monthly expenses for a total of $85k out of pocket. I would have just $26k in equity, the other $40k I don't get back. That doesn't include costs of upkeep, which are supposed to be around 1% of the home value per year (another $8k after 5 years).

I'd wager that many if not most people never run the basic numbers and in fact may be simply incapable from a mathematical perspective of figuring out the total cost of owning vs renting. Buying a house is exorbitantly expensive. The only reason most people's primary asset is their home later is not because it's a good investment but because they were incapable of investing competently anywhere else.

Buying a house is likely to be cheaper than renting one for sure but generally people upgrade substantially in size and that comes with a big cost.

I also find it amusing in this thread that on one hand, you're throwing away money when you rent. And, on the other hand, real estate is a very poor investment. Some sort of magic must occur between those two statements.

Both are true but do not tell the entire picture alone. You do throw money on rent. You also do throw it away on a mortgage with its interest. Probably more, and you have maintenance costs, that's why it's a not-so-good investment. Stocks and businesses are investments, these other things are domiciles and that is their primary function.

Agree with the rest of your post. People are sick and chasing the wrong solutions to what ails them.

 

[simpletron]

The median income in 2009 was $50k. On that income how many years do you think it takes to save a 20% down payment for a $300k house, while paying rent? In that time how much money is lost permanently to rent?

A family making 50K wouldn't be able to afford a 300K. Rule of thumb is 3 times income and the median home price is less than 300K(closer to 200K).

In the past year I've spent $11,700 on rent... Let's say it takes 10 years to save $60k. 10 years at my current rent of $850 comes out to $102,000. That's $102k of value lost forever... Far more than the interest difference between a 20% and a 5% down payment.
With a 30 year 5% interest mortgage on $300k and 20% down payment you pay $223,813 in interest.
With a 30 year 5% interest mortgage on $300k and 5% down payment you pay $253,310 in interest.

Since the same person would be doing both, if that person can afford the 1529.94 payment for the 5% down payment loan, then they should be able to applied the difference in payments of $241.57 (1529.94-1288.37) as additional principle to 20% down payment loan. A 30 year 5% interest mortgage on $300k and 20% down payment with a $241.57 monthly prepayment would end after 21 years and 3 months and you pay $150,107.57 in interest.

How does it make financial sense to pay such a big down payment? You spend $30k less on interest, but $102k more on rent, and your home ownership is delayed by 10 years.

Edit: Forgot to consider the time to save the 5% down payment. That adds up to $25k in rent. So for the 20% mortgage you blow $75k more on rent to save $30k on interest and you wait 10 years instead of 2.5 years.

By my calculation you save 103K in interest and pay off the house earlier by saving a 20% down payment. And you forgot to include interest on while you're saving, which would make the 20% down scenario even better.

 

[Zebo]

I agree. However I got one of those zero down deals deals and it has worked out well. Granted there was no huge housing bust here, so I guess I was lucky!

And your house costs a lot more because of it. What is inflation? Your work paying for the spread of debt slavery and true owners doing nothing. Mix that with supply and demand Americans get a raw deal. Debt does no one any favors unless cash flow exceeds interest and payment, homes dont.

 

[Doppel]

And your house costs a lot more because of it. What is inflation? Your work paying for the spread of debt slavery and true owners doing nothing. Mix that with supply and demand Americans get a raw deal. Debt does no one any favors unless cash flow exceeds interest and payment, homes dont.

A fair statement for an investment, but one's residence is a cost anyway, whether in a house or apartment. As does one's food, bed, etc. All that really matters is what is the total cost over the period of ownership or use.

 

[ShawnD1]

I also find it amusing in this thread that on one hand, you're throwing away money when you rent. And, on the other hand, real estate is a very poor investment. Some sort of magic must occur between those two statements.

They're both true. Money paid to rent is money you never get back. Money paid to interest on a loan is also money you never get back. Buying a house as an investment is also just as stupid as buying a car as an investment. You should buy a house because you want a house, not because it will solve your money problems (because it won't).

 

[IceBergSLiM]

You guys don't even know about high house prices. This is for a shitty suburb way out on the edge of the city.

Year Median House Price House Price % Change (YoY) Median Unit Price Unit Price % Change (YoY)
2002 $67,000 16.5% - -
2003 $105,000 56.7% - -
2004 $149,000 41.9% - -
2005 $283,750 90.4% - -
2006 $395,000 39.2% - -
2007 $430,000 8.9% $317,500 -
2008 $412,000 -4.2% $325,000 2.4%
2009 $415,000 0.7% $335,000 3.1%
2010 $425,000 2.4% $325,000 -3.0%


Imagine being a guy with a family in 2003 who earns $18k a year. You want to buy a house so you start saving for 20% down on 100k. It takes you 3 years to save the 20k. But now the house is 400k.

LOL Wat!

people earning minimum wage or just above it should not be buying anything that won't increase their salary. (i.e. training /education / tech skills)

 

[SunnyD]

I shall forevermore be happy with my 0% down mortgage I closed on last year.

 

[Throckmorton]

I shall forevermore be happy with my 0% down mortgage I closed on last year.

But you're irresponsible and a bad person and unamerican too. You should be renting and saving money to prove to our corporate overlords that you are fit to bear the responsibility of owning a piece of your country.

 

[theeedude]

This is simple. You can not just turn around and set some 20% limit. IT SHOULD EXIST!

You have to slowly build up to 20% though. Set a floor at 2% and increase it by 2% every year. This is the only way to fix things.

How on Earth things got so F'ed up is beyond belief. But leaving things as is is stupidity.

That is a horrible idea. It should just be set and done. Otherwise, people will continue waiting as downpayment requirements rise, reducing demand and lowering prices.