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Sunday, May 3, 2009
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57 comments:
Irvine Housing Blog has a particularly good post today, with this gem in it, that could have been aimed directly at me....
"Many buyers will not even bid on a property unless they are “in love” with it. This behavior almost guarantees overpaying for a house."
it's discussing the negotiation process, check it out IHB negotiations
The Next Housing BustThe FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law FHA must carry a 2% reserve (or a 50 to 1 leverage rate), and it is now 3% and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts.. . . .
A major lesson of Fan and Fred and the subprime fiasco is that no one benefits when we push families into homes they can't afford. Yet that's what Congress is doing once again as it relentlessly expands FHA lending with minimal oversight or taxpayer safeguards.
U.S. Home Prices May Be Lost for a Generation
from zerodown's link:
"The higher FHA loan ceiling was also supposed to be temporary, but this year Congress made it permanent."
brilliant. Permanent until FHA collapses you mean....
Hello All:
I've been quietly reading this blog for a while...and I'm wondering if someone could advise on something. I recently bought a condo in North Arlington with an FHA loan (which requires you to move into the property) and we had every intention of doing so. But recently my husband's job has transferred him and it took a toll on our income, and we may have to stay where we are renting now in MD. We want to rent out the condo for a 6-mo or year term, (instead of selling it right away and paying thousands in capital gains tax because our profit will be quite large), and eventually we WILL move in, but I am afraid of committing "loan fraud." Has anyone ever heard of this being an issue, where the lender figured out it was being rented out, and took legal action?
State's now monetizing the $8k buyer bribeGreat. Just great. Make it even more blatant that Uncle Sam is replacing the seller kick-back downpayment plan. I will be so glad when this thing ends. Tough call if I'll be even happier if they up it to the $15k the Republicans were asking for and only apply that to those who couldn't be convinced to jump off the fence by the smaller bribe. Nah, that'll just make me sadder.
Lisa,
Check out the FHA website to see if you can get any clarity, and re-read your closing documents carefully.
But, know that the transaction costs are valid to count against any potential gain, even if you dont' qualify for the $250,000 exemption due to lack of length of ownership. Check out the IRS website while you're at it.
I'm confused as to why you think you'd have a gain if you bought this so recently that you haven't moved in yet, but I'll leave that alone.
That FHA article is very interesting. I think I actually don't have a problem with low-downpayment loans (maybe 5% would be more reasonable than 3.5%) since it can take a really long time to save up $60k for a 20% DP on a $300k house, but I think the borrower should have to pay a higher premium to account for the risk (just googled and found that it's only 1.5% of the loan balance). In a market where home values are declining at least 1.5% a *month*, it seems to me that this doesn't create enough of a reserve to protect taxpayers when borrowers default.
@ Cara: Similar to my feelings about FHA, I'm not sure I have a problem with people getting their $8k sooner, but why oh why are some states providing it interest-free??
Why are state's providing it interest free? Because they want the empty houses to sell. The sooner they sell, the sooner prices start to go back up. The sooner prices start to go back up, the sooner they get their property taxes up again.
Cara--
I can't predict from one day to the next how I feel about current housing prices, trend predictions, your particular situation, or whether I might buy again soon. I'm too schizoid and/or manic-depressive.
But I might suggest turning that comment around, and taking it as:
"If I'm almost guaranteed to overpay for a house, then I darn well better love it!!!!"
I actually, think that if you:
1. Avoid being a player in a bidding war.
2. Avoid gushing about house features and where you will place your favorite rocking chair, at ANY house showing, in front of ANY agent. (++)
3. Stay informed about local comps, foreclosures and inventory and use it in negotiations.
4. Create a careful checklist of house must-haves, can't-haves etc, and use it at every showing.
and
5. Stay patient and avoid counting on any one house deal.
...then, there's a good chance you can get a house at a price that is "currently" right. Then all you have to worry about it what will happen or not happen in the house market and the job market in the next years.
(++) There's a reason why every real estate agent I've gotten to know is also an avid poker player. Gotta bring your poker face to THIS game, too.
Caught this article from Patrick.net
http://www.huffingtonpost.com/dave-johnson/todays-housing-bubble-pos_b_195217.html
A friend of mine submitted an offer on a foreclosed property. Deal has not gone through yet. The first offer was rejected because the realtor said "We have another offer at X price. Can you match it?" She came close, and won. She received a bank addendum that showed her first offer, and her highest and best offer, which was her second offer. The addendum listed the realtor commission on her first offer at 7% and on her second offer at 8%. Nothing in her offer referenced any type of commission since the seller enters that contract with the listing agent, and the seller pays the commission from the sales proceeds.
A. How common is it for banks to pay a 7 or 8% commission on the sale of foreclosed properties?
B. Has anyone seen this where the commission increases as a result of the sale price?
HEY! I just noticed I hit on the poker reference and the mention of bidding wars without even having first looked at that negotiation article or it's commenters on that site.
Yay for me.
One more suggestion I'd add:
6. Be the buyer that's hard to find:
- The one with problem-free financing all ready to go.
- The one who's picky, but attainable. (Wants changes but is willing to work with the seller.)
- The one who doesn't have personality/behavior flaws that make you not worth dealing with (indecisive, insulting, paranoic, hard to get on the phone, a couple that insists on tag-team or good-cop bad-cop games, etc.)
Scott,
Sadly, I don't think I have a poker face. So my best bet for not letting my agent know how much I like a place will be to have a round-robin list of places all of which would be acceptable, and have different pros and cons. I.e. the sure, I would love this place at the right price, but I also would love these other 3 for other reasons, so what's the big deal?
Willingness to continue renting is the only other card I have. I've been doing it for 12 years so far, what's another 2?
In regard to:
"We have another offer at X price. Can you match it?" She came close, and won.
I think if any agent ever tried that with me, one of two things would happen:
If I wasn't married to the house (see my other comments), I'd walk.
If I really thought I should have the house, I'd say:
"Okay, here's my new offer, which, if you accept, is contingent on me being able to contact and verify the actual existence of the other offer. On penalty of X thousand dollars if you fail to provide it."
Then, if the "other offer" if FAKE, like it probably was in the case of my sister's house purchase, THE SELLER's agent would walk. Or take my original offer. Either way, I don't risk getting scalped.
Scott,
I probably would have walked. Banks aren't going to agree to contingencies regarding verifying other offers, and I'm certain they won't agree to paying a penalty if their realtor lied.
"If I wasn't married to the house (see my other comments), I'd walk."
Actually, I meant to add, with the market being what it is, in certain cases, I'd say "I don't play that game, so my offer is now another X thousand LOWER, and if you don't accept, I walk."
In my experience, this kind of thing drives salesman of all types nuts--which is WHAT YOU WANT. Remember, you have something they NEED, so they won't STARVE: a commission.
For those of us without a good poker face during the walk through, there is something far more powerful - set your final offer firmly and walk away if someone tries to call your bluff and don't play wolf with this (e.g., don't say it's final if it really isn't). Unfortunately, agents who don't know you may think you're bluffing and may mess up the negotiation, causing you to lose the house, but I think that's unlikely. Your agent will probably work hard to make sure that doesn't happen.
Sorry, I shouldn't have said "during the walk through" but rather "during your viewings prior to making an offer."
"That FHA article is very interesting. I think I actually don't have a problem with low-downpayment loans (maybe 5% would be more reasonable than 3.5%) since it can take a really long time to save up $60k for a 20% DP on a $300k house, but I think the borrower should have to pay a higher premium to account for the risk (just googled and found that it's only 1.5% of the loan balance)."
I disagree completely.
If you can't even save up 20% of the price of a house you want to buy, you aren't ready to buy. It really is that simple to me.
I feel the same way about the $8k handout...
The problem here isn't simply one of "there needs to be a down-payment."
People need to prove they have the ability to save up some money. That takes discipline over a relatively long period of time. If you can't spend less than you make for a few years then you shouldn't be buying a house. Not only that, but you should be able to put down that 20% down-payment while keeping a healthy cash reserve in case something breaks in the first month of ownership.
As long as the government keeps trying to find a way to make it "easy" to buy houses, the foreclosure problem won't go away.
Leroy,
Well said as usual!
I had one co-worker trying for the umpteenth time to convince me to buy as soon as possible as much house as I could qualify for and leaving no back-up cash on hand. I don't try to convince him otherwise anymore, just find other points of mutual agreement...
(he thinks the reason he had to bring money to the table to sell in 2000, after buying in 1991 was because he didn't buy high enough up the housing ladder, not that he bought before the last bubble had completely fizzled and the whole region stayed flat during that intervening 10 years, he also thinks the reason the current house is doing so well is because it's high enough up the food chain).
Ya, round-robin, I didn't think to list that "play one against the other" type thing--although it somewhat falls under my #5.
That can also work great with cars and car dealers, by the way.
"Sadly, I don't think I have a poker face"
Well, I think the checklist strategy is one way to improve that. If they see you come in, whip out a two page categorized list, like I had, which includes everything from "walk in closet", "fireplace" and "patio", to "south facing sunny windows" and "short walk to Metro", to "no bugs", "no evidence of flood", "30 amp electrical service", "at least two heating/cooling zones", then they will see that they aren't in a position to be your "hero" for finding you your dreamhouse. Instead, the house IS BEING GRADED, and by association, THEY are being graded.
If you focus on your checkmarks, you may be able to take some of the emotion out of it--and, you might avoid getting so caught up in the gourmet kitchen that you don't notice there are no closets near the guest bath, etc.
(It might take a bit of the fun out of the search, though, too.)
Before buying my first (and only, so far) property, I spent two years looking at models and open houses without ever picking an agent or talking to a lender (but did run loan numbers on several websites.)
During this time was when I found out all the options out there and which were important or not-so important to me. (Admittedly, this was during two years when prices were already grinding higher--but so was my income, so the house I wanted didn't really get away from me.)
One CRUCIAL example--I realized that if you get a three or four level townhouse, a lot of them have ONLY ONE HEATING/COOLING ZONE--which means the top floor may roast in the summer and the bottom floor may be suitable for storing meat in the winter. TWO zones--much better I think--but can't guarantee that, since I ended up with a single-level condo--but still with two zone HVAC!
Anyway, with SFH's--multi-level or not--perhaps multi-zone heating is more typical; but I have no idea because I never really shopped among those.
Last point--obviously no house HAS to satisfy EVERYTHING on your list--but any missing check mark is a price negotiation point you won't be as likely to forget to use. (When I did start really looking, I kept going until I found everything except the walk-in closets, which in 2002 were quite rare in downtown DC condos in my price range.)
Okay, REALLY last point--the checkmarks (and notes made in the margin) make it easier to objectively compare one property to another as your search goes along...
Leroy,
As one who took out some FHA's and then some 5% down loans in the past, I think you are dead wrong. What went out the window was UNDERWRITING. My first several loans were extremely difficult to get.
Requiring 20% down will just limit homeownership to the wealthy and their kids Not everyone can go to mom and dad for the 20%.
Leroy, I agree with you that you should be able to save a substantial amount of money before you buy a house, but in an area where $300k buys you a starter home or a 1br condo, it would take almost 10 years of putting away $500/month (a little less because of interest earned on the savings) before someone would be able to buy their first house. And factoring in high rents, student loans, and the chance of running into a medical crisis or a period of unemployment, saving $500 a month for 10 years is really, really hard.
Maybe this means prices are too high, but where they are now if there were no FHA or downpayment assistance programs most people woudn't be able to buy their first house until age 40. Maybe you don't think there's anything wrong with that but I think it's unnecessary to make it that difficult. I don't see anything wrong with FHA being kept around and modified so the DP requirement was 5-10%, the loan limit lowered to something like $300-400k, and the mortgage insurance premium raised.
anon412
(1) it does mean prices are too high. In fact it means exactly that.
(2) $500/month at the beginning is fine, and a good way to start a habit of saving, but we're socking away $1500/month, cuts the time by a third... It's a great habit and will allow us to keep saving after we buy for things like college funds, retirement, cars paid for in cash, renovations.
But Patrick had a good article today, it was in the Big Money, on the fallacy of personal finance gurus. End of Personal Finance?. It was an interesting read for me, since I've been essentially trying to shoulder the entire burden of financial solvency on our own for a while now.
That said, I agree with your recommendations, 5-10% down, and a higher fee to actually cover defaults would be good. I really like the WSJ's advice of having banks hold 50% of the risk though, putting them on equal footing with VA loans.
Cara: I agree that it means prices are too high... but I'm not sure they will ever be low enough in DC where 20% down is realistic. I also liked the part in the FHA article that compared the program to the VA's where the banks have 50% skin in the game. I think that would help a lot too.
About saving, I think a key word in your statement is "*we* are saving $1500 a month." Much easier for a married couple to do that, and I think we both agree that single people or a single-income couple should be able to afford a modest home or a 1br condo.
I'll modify my previous statement to say that I think in a lot of cases a single person buying a 1br condo is not a very wise decision since there's a good chance they'll want to move within 5 years, but I think it should still be more affordable/attainable. I actually think there are too many condos in this area and not enough apartments given that a small space is the kind of housing that the population that should be renting is in the market for. Especially studios... that there are any studios that are condos instead of apartments boggles my mind.
Anon412,
Given the high percentage of unemployement for the youngest workers, I think having the freedom to reduce your housing costs easily and move cities for a better job is a lot better plan than owning when under 30. (Leaving a 30-40 age gap)
DC, sadly, may in fact become the next NYC. And owning for singles or single incomes may in fact be only for those in the upper quartile of incomes. FHA's not going to stop that. It'll just provide more buyers to keep the prices high.
I don't know which is the cart and which is the horse here though, down payment amounts, or house prices. At the extremes, it's easy to tell, cash-only purchases limit owning to those that alreayd have wealth, and no downpayments create enormous bubbles. How they balance under more moderate conditions is harder to judge. Bet you some one has written a paper on that somewhere...
Underwriting is also essential VA_Investor.
"Requiring 20% down will just limit homeownership to the wealthy and their kids Not everyone can go to mom and dad for the 20%."
That is just bull.
I am talking about saving money, not going to mom, dad, or the government for it. That was the whole point of what I wrote.
Saving up a significant down-payment should not be that hard, but it takes time and nobody seems to be willing to wait.
Cheap and easy credit for everyone is what got us into this mess. If significant down payments became the norm again home ownership rates would drop again, probably back to where they were pre-bubble, but that wouldn't mean that only the rich would be able to buy with handouts from their parents.
I think there is a place for FHA, but not at all in the way the government is currently using it. When the program was self funding who could possibly complain about it? It provided a useful service without relying on taxpayer handouts. Now they are setting it up to fail in a misguided attempt to rush people into houses they shouldn't be buying.
"(1) it does mean prices are too high. In fact it means exactly that.
(2) $500/month at the beginning is fine, and a good way to start a habit of saving, but we're socking away $1500/month, cuts the time by a third... It's a great habit and will allow us to keep saving after we buy for things like college funds, retirement, cars paid for in cash, renovations."
Exactly, on both counts.
If all you can save is $500 a month... well then you shouldn't be buying a $300k house.
"Cara: I agree that it means prices are too high... but I'm not sure they will ever be low enough in DC where 20% down is realistic."
Why not? It was perfectly realistic not that long ago.
The last few years are an anomaly. Historically DC has not been that expensive a city to buy a home in, and that was with 20% down payments.
If you have a single income family because your spouse is either a stay at home parent, disabled, or can't work for some other reason then in most of the country they can still afford to buy. In the DC area, when you're paying 1200 - 1700 a month for rent or maybe even more if you have a couple kids and a small house you're renting then it can be quite hard to save up money.
There is definitely a place for FHA loans. To say that everyone can save up the downpayment is a bit out of touch and simply because someone can't save 60k for a downpayment doesn't mean that they can't make the payment on the house.
In the vast majority of the country a single income making 40k a year can buy a house that costs 125-150k. Here that house costs 250k (if you're lucky). Of course the income is also higher here but it's also significantly harder to save 50 or 60k when you have very high rent than it is to save the smaller amounts.
Do you propose that everyone just keep living with their parents with their 2 or 3 (or 16) kids until they mooch off of them enough having not paid rent to save the downpayment?
I'm going to be another one that disagrees with Leroy. There are times where the down payment % is much less important than personal income. My wife has just spent three years and many, many thousands of dollars getting her MBA. Come summer, she will be done, and we will be one of those obnoxious DC couples with secure jobs making close to $200k. Are you really telling me that we shouldn't buy because we weren't able to save, say $110k while she's been in school? (20% down on a $400k house, $30k in reserve, 2:1 house:income ratio).
The rents here are part of the problem, and therefore should not be allowed to be an a priori assumption into the equation of whether you can save up.
Personally, I think it's irresponsible to have children before you're financially ready to care for them. I know, obnoxious of me. But in most parts of the country, this is not that onerous of a requirement.
As for single people? Ever heard of roomates? Saves a lot of money on both rent and combined food expenses. If you insist on paying rent all by your lonesome, then, yes, saving will indeed be very difficult unless you have a high income.
As for why will DC change? This is in reference to CRT and my's ongoing conversation about the sad progress of cities to greater and greater rental percentages. The gains that are won in each bubble sometimes get baked in to desire-able cities and they never return to their pre-bubble prices until the collapse from lack of supporting jobs.
As far as rents themselves, I blame section 8. It sets an artificial floor for rents below which you just can't find one. That can't be a good thing for keeping rents in line with incomes. And with the bubble run-up pricing people out? The captive audience doesn't help.
And Fred, sorry, actually, yeah I think you would do better to wait in this environment before buying and experience what it's like to have that money first, so that you won't part with it so readily. I know, crazy.
Expanding on what I said before though, I'd really like to see an empirical study of the impact of lower down payment requirements on age of first purchase, home prices, and default rates.
Most people keep arguing for FHA based on individual needs and wants. FHA worked for me! Or so and so need it. But don't you realize that if it helps everyone it helps no one?? In fact it could easily hurt everyone when individual incentives are aggregated?
And I think Leroy's caveat is important:
"When the program was self funding who could possibly complain about it? It provided a useful service"
It was basically like a giant credit union for home buyers who didn't want to delay. And that's not necessarily a bad thing. It's just that, I can't see how it "helps" things to speed up ownership in a market where renting is cheaper than buying. That's just asking for people to overpay either on the way up helping inflate it or on the way down, creating more defaults.
Fred,
I would say that your risk profile will be somewhat dubious. You will be a perfect example of an alt-a loan --- and some of them are not doing that great. How many times people need to repeat that unless a person has a lot of skin in the game it is possible that even a small change in prices/income/employment will drive people to foreclose.
I do not say that you don't have to buy, but at the same time you certainly pose MUCH more risk to the bank than someone with 20% down.
Cara, personally, I don't think that most people try to have kids before they're financially ready. A lot of people that have kids didn't plan on having them. Then again, abortion is an option but a lot of people either don't agree with it or are convinced not to have them by their parents even though they are not financially ready. I don't particularly want to get into an abortion debate so lets just say this: most people having children before they are "ready" didn't intend to have them.
I still believe that FHA is a perfectly viable option and don't believe that because someone had kids before they were ready that they should be forced to rent for basically the rest of their natural lives.
Anyway, I think I've said too much. I don't think our personal beliefs should be particularly valid as a reason for banning people from having children as I could believe anything I want as well.
Cara said:
"...when renting is cheaper than owning..."
We have reached rental parity in many parts of this region. I don't think section 8 is an artificial floor. It has been very expensive to live in this area ever since I have known - 1981.
It has never, in my experience, been cheaper to own in mid-high tier neighborhoods. Ever. There is a "cost" or premium to owning. Part of this is due to the tax benefits. There is a reason that people like me don't buy 600 or 800K rentals. The numbers don't work and never have. The other side of the coin is that people of a certain age or income do not find being a renter a pleasant, or even acceptable, thought.
I would hope that PMI requirements on FHA loans are becoming much more onerous and PMI premiums are skyrocketing given the recent performance of FHA loans.
The people taking out these very risky loans should shoulder the associated costs, not the taxpayers.
Zerodown,
FHA loans were not always that "risky". Upfront mortgage insurance premiums were steep. On several occasions I received a prorated refund of the mip when I paid off an FHA. The amount was computed based on the loss experience of loans originated in the same year as mine.
It's the underwriting!
Perhaps it is a new "morality". It's now OK to be a deadbeat, just as it became OK to declare Bankruptcy or be on welfare. The stigma has evaporated.
So, yes, perhaps things should change; many things.
But why would you propose throwing out a program that has worked perfectly well for decades just for one blip in time?
But why would you propose throwing out a program that has worked perfectly well for decades just for one blip in time?I didn't propose throwing it out, just that the participants in the program bear its costs. If the costs become too great, however, . . . .
Jeff,
That they were not necessarily intended is a good point. That does indeed happen even to those using contraception.
I also come from the NE where grandparents own 3 level homes, with kids and grandkids downstairs, and tenants on the groundlevel, so I'm a little confused as to the strong opposition in this country to intergenerational housing as a low cost solution.
But really if the rents are too onerous here, why would 1 income families stay here unless they had family here, and if they have family here, why can't they support each other in hard times. It confuses me.
At the same time I think the Big Money has a strong point, that we should be asking for more of a safety net from our government and admit that individuals are subject to the whims of chance. I vote first for universal health care as step one to reduce the burden on individuals, such that happening to be the one with the nasty disease doesn't kick you out of your house.
Oh, and I should also apologize for characterizing those in favor of low down payments as people who are only considering the individual aspect. This was unfair, since Leroy's main thrust was on the same terms and was what you were reacting to primarily.
Here's my take on downpayments:
I think a 20% downpayment or some similar amount should be required to own a home. Some skin in the game, as others have said. Not only that, but you're ill advised to buy a house if you don't ALSO have 6 months take home pay saved up!
Why? Because it demonstrates that you have graduated to the apparently small portion of the U.S. population that is financially savvy, and understands the essential nature of life, which is MAKING CHOICES and PREPARING FOR RISKS.
Too many Americans think they can HAVE IT ALL--are even ENTITLED to have it all, and then get all crybaby when this goes wrong, or someone else with their own interests in mind (such as a lender) tell them they can't.
If you allow homeownership to be an entitlement, it simply makes houses more (too) expensive AND makes risk premiums on loans too expensive. The former just happened; the latter may be ABOUT to happen in the extreme.
Sorry, but some people can't have a Costa Rica vacation AND a big screen TV AND save for retirement, AND save for or make payments on a nice house. Some people are lucky, but the rest of us HAVE TO CHOOSE.
Sorry, but in a HEALTHY market, I feel 20% down balances the equation of mortgage + maintenance + insurance + taxes versus renting quite nicely. And we've had an UNhealthy market partly precisely BECAUSE people weren't required to have enough skin in the game!
If you can't save up 20% for a REASONABLY priced house in a reasonable amount of time then you probably:
1. Spend your money too freely or or are losing it in some other way, such as debt burden or stock market speculation, which are signs that your consumer and financial savvy may not be adequate for homeownership.
2. Have had hardships or burdens (illness, employment gaps, kids) that may indicate that the burden of homeownership is not for you.
2. Don't have a good enough income relative to the local cost of living, a sign that you should either move to a cheaper region, ramp up your career goals, buddy up incomes, or scale back your lifestyle expectations.
And if the houses around you AREN'T reasonably priced, then you shouldn't be trying to buy a house AT ALL, because that's just asking for LESS financial security.
Full disclosure: when I bought I didn't put 20% down. I got an 80/15/5. BUT, I COULD HAVE--and I DID have several months take home pay for emergencies. And I did end up paying down most of the 15% second lien fast, over 4 years or so. And based on my prior savings rate, I did the math and I knew I could afford the larger mortgage, PLUS the (large, as it turns out) maintenance costs, PLUS whether a medium-length employment gap, which did actually occur.
I was 37 when I bought this, my first house. Why? Well I married young and got divorced at 31, and didn't have all that much saved, due to a mixture of the reasons listed above, so I spent those 6years boosting my career and SAVING, by living WELL BELOW MY MEANS in a crappy little apartment I hated.
Make the choices. Pay the dues.
Another example--if you want to live near the Metro, but the premium for that is too high--GIVE UP YOUR CAR. Problem is, car ownership in this country is ALSO widely thought of as an entitlement. So is parenthood, really, but let's not go there.
The main problem though is, too many people are too eager for someone ELSE to have their money, as soon as possible. It's an addiction.
I completely disagree with VA_Investor about down payments and affordability.
Raising the requirements back to 20% would initially make housing less affordable to a lot of people. After all, with SFH going for $500k, it takes a long time to save up $100k.
But, what happens is that as eligible buyers dry up, so does demand. And then prices adjust downward, making houses actually more affordable.
Case in point: I found some old emails from my realtor back in 2002. The properties she sent me were in the low $200ks. By 2005-6, these places would have been going for $500k. Why? Part of it was due to teaser-rate loans, but part of it was due to increased demand due to an increased number of eligible buyers. Increase down payments and you decrease the number of eligible buyers for that price-point. Eventually prices shift downward to a lower price-point.
Oh, and for what it's worth, a buddy of mine put a bid on a house last weekend. It has been on-and-off the market since January. The reason it went off and came back on the market twice was due to two FHA loans that fell through (or the buyers got cold feet before closing). The owners vowed to never accept an offer from someone with an FHA loan again -- only offers from folks that could put down a sizeable down payment would be considered.
"In the vast majority of the country a single income making 40k a year can buy a house that costs 125-150k. Here that house costs 250k (if you're lucky). Of course the income is also higher here but it's also significantly harder to save 50 or 60k when you have very high rent than it is to save the smaller amounts."
If housing prices are out of line with incomes, then prices need to fall.
Loosening lending requirement is what allowed prices to reach the levels they have in the first place. Higher down-payments would make it harder to buy, that is true, but they would also result in lower prices, which would make it easier to buy. The end result would be a slightly lower home-ownership rate.
DC will never be the easiest place to buy, but by large city standards it has historically been among the easier options. (More in line with cities like Atlanta, Houston and Dallas than NE cities or west coast cities.)
"I'm going to be another one that disagrees with Leroy. There are times where the down payment % is much less important than personal income. My wife has just spent three years and many, many thousands of dollars getting her MBA. Come summer, she will be done, and we will be one of those obnoxious DC couples with secure jobs making close to $200k. Are you really telling me that we shouldn't buy because we weren't able to save, say $110k while she's been in school? (20% down on a $400k house, $30k in reserve, 2:1 house:income ratio)."
Why not wait a year then?
It is great that you will be in a position to bring home a high income, that makes everything easier. (not to mention targeting a 2:1 house to income ratio)
The issue is not simply incomes however. There are plenty of high-income people with financial problems.
Fred,
A bit of fair disclosure...
My wife and I are lucky to be among the higher earners in the region.
When I first graduated I lived in a 2 bedroom apartment with two roommates.(one in the living room) I could have afforded the place by myself.
When she graduated she lived at home.
When we first got married we didn't even consider buying because we didn't feel we had the money, plus it was the height of the bubble and we knew buying would be nuts.
So we waited... and saved. We rented a place far cheaper than we might have and put up with all the problems associated with that. Everything from it being a cramped and generally crummy old place to having my car broken into.
etc etc
I won't bore you with the details because I don't feel there is anything remarkable about them.
My point is that we have intentionally lived well beneath our means so that we could save money. Now we have well more than enough saved up for a down-payment and will continue saving despite that.
We have made a lot of sacrifices to save this money. It isn't a mystery to us where it came from.
We didn't do anything special, we just spent less than we made and banked the difference for a few years. I can certainly understand why that might not be anyone's first choice, instant gratification is nice... but I also don't have much sympathy for people who act like it is asking too much for someone to sacrifice for a couple years in order to earn something they want very much.
Cara,
Can you help me again? I just posted to that old thread again and I don't have the time right now to re-write it! Ugh! Too early and not enough coffee...
My son will be home next week and can try again to teach me linking and cut & paste.
Cut and pasted from Va_investor in the wrong thread:
Va_investor said:
My experience, in general, is that most money that comes in goes out. Rquiring 20% down has long term societal ramifications. For the vast majority, home equity is their largest asset at retirement. Making it difficult - impossible, in some cases - to purchase because of the inability to save 20% plus reserves will potentially create a class of retiree's that are practically destitute.
While your short-term goal of lowering housing prices may be accomplished; but at what cost?
Mortgage payments are akin to forced savings. If rental parity for first time purchasers and/or lower than median income purchaser is available (which it is in many locales), I see no reason to slam the door shut.
After-all, it will be the prudent among us that will paying for seniors who end up in a position where rent has become unaffordable and retirement funds are meager.
What exactly is the risk to new FHA (and VA loans). Prices have adjusted. It makes sense that risk has also adjusted. Premiums on mortgage insurance and interest rates are fully in place.
I have no problem with an increased renter society provided more money is saved for retirement, but in the real world this is not the case.
By the time this years 40 yr old retires, rents will far exceed today's mortgage payment. There will be no reduction in living expenses in retirement because there will be no paid-off house.
Look at those being foreclosed upon. They could not afford the payments to begin with and, due to a number of reasons, wildly overpaid and bought over their means.
For the most part, FHA loans WERE NOT being utilized - check the stats. Liar loans and no income/no-asset and teaser rates are the culprets. Not FHA.
Utilization of FHA has increased due to the lack of this financing and these FHA loans require proof of income and other standard underwriting practices.
One last comment for Fred - another reason to listen to Leroy et al. is that this is a bad job market for MBAs. Even if your wife is fortunate to obtain the same level and type of job, with the same type of firm, that she dreamed of before she started graduate school (and many grads of great schools are NOT getting these), she may hate the job or certain conditions that she couldn't assess in advance. If you are locked into an expensive mortgage, she may feel equally locked into a bad job situation, that could adversely affect her longer-term career - or someone may terminate her soon after hire because the firm over committed its resources in a very down time. Or they could take advantage of her skills and demand extremely long work hours and travel because they're expecting her to do the work of multiple employees.
So my point is not to be Debbie/Donald Downer, but rather, that not only should people have the saved down payment plus cash for furniture, repairs, and emergencies in case of a lay off - they should have reasonable job stability - "I like you, you like me". Since MBAs from the top schools rarely take government jobs, job insecurity is a relevant factor in most of the jobs they take. Many MBAs leave that first job after a few years. You and she should wait and see how it works out. If you were in Indianapolis and plunking down $150K instead of 400K+, it would be a less risky decision.
The numbers still show that price to buy is still out of line with income metrics for the area with some exceptions (PWC perhaps). Every time this happened before, even in DC, the ratio corrected, but it can take 5+ years to do so. Given the unusually large disparity between unemployment here and the rest of the country, it could take much longer if that continues.
FHA loans are clearly subprime lending funded by the federal government. We should remember that it was created in the wake of the Great Depression when housing prices plunged. Given the financial decline, it is going to be even harder for most people to save up the downpayment for the next several years. Granted, the downpayment requirements were even higher when the FHA was created and the FHA over the years has departed somewhat from its original purpose. That doesn't mean that its continued existence isn't guaranteed by political forces for the next several years.
The government is clearly going to do whatever it can to support house prices. Long-term for consumer spending, this is probably good and that will support the broader economy. Those of us who want to wait for the price/income ratio to return to historic norms will be waiting and watching for a long time.
The more interesting question, why did anyone ever get a subprime loan that was *not* a FHA loan? That just seems like pure idiocy and I don't understand why we don't regulate those kind of loans. Perhaps I have answered my own question.
Ace,
My wife and I are both feds. She got her MBA through an evening program at a top school that basically sucked a bunch of money and 3 years of her life away (working in a professional job and going to school sucks in the worst way). Unless the gov't implodes (not a complete impossibility), our jobs are safe. And if they aren't, then the country is in a whole other world of hurt where I'd rather be squatting in a house with a garden than renting our current garden apt. We'd like to have at least a year in our house before starting a family, and since she is already 30 the clock is ticking. I'm not talking about a 3% DP here, we have 10% now and will have 15% by July or so, but I just don't fundamentally agree that a 20% DP is showstopper.
fred,
That changes things subtly. We felt the same way when we were at 10%, 20% just seemed so unecessarily far. But luckily that was over a year ago when it was obviously foolish to buy. Somehow once we got to 15%, getting all the way to 20% and avoiding PMI hassle altogether, and it strengthening our offer, just seems too attractive not to wait for. Then again, I'm perfectly willing to have our first kid in our current rental if it will be more financially savy to do so. So, I don't get that part.
On an individual choice basis 20% down doesn't make sense as a hard and fast rule, but on a market-wide basis in terms of how letting entrants in sooner can inflate bubbles and prop up prices, it's not a necessarily a good thing.
@fred,
I was going to say something along the lines of what others said so I won't.
I will say for kids (to each his own) but personally I wouldn't worry about buying a house before you have kids. Look at tabitha . . .. 7 kids before she bought. I have a 1-year old and I still rent (I do have 20% + lots of extra).
Honestly, infants/toddlers don't give a darn (until they get old enough to be influenced by peer pressure-around 2ish), where they live. They don't care if you live in a mansion or in an apt. They don't care if you buy them designer clothes or from the salvation army. They only care that mommy and daddy love them, play with them, and take care of them.
Why the push to own before you have kids? Nesting?
Personally, I say start to have kids when it's the right time and buy when it's the right time . . . and they are mutually exclusive.
Starting a family and buying a house while somewhat related should not depend on each other.
-----------------------------
(beforewarned, rant unrelated to housing coming-I will prob. piss people off but sobeit)
I have a fricking HUGE problem w/ people starting a family and then both parents working while the child is extremely young (before school-age). You should not be a parent if you ELECT (due to bigger house, jobs, etc.) to have BOTH parents working while a child is young. Parenting is hard work, but a child IS NOT A FRIGGING TOY THAT YOU CAN DROP OFF AT 7:00AM AND PICK UP AT 5:00PM M-F, just so mommy and daddy can work "big important money making jobs", get over yourselves. THE MOST IMPORTANT JOB IS RAISING YOUR CHILD, NOT YOUR WORK-JOB.
Children aren't dogs, they aren't playthings, they are another human being. The responsibility is huge, but the rewards are so, so, so much . . . I can't describe it.
Having a day-care worker raise your child doesn't cut it-they need a family 24/7 for the first several years.
I do completely understand that there are cases were both parents have to work. However, IMO too many parents ELECT to have daycare workers raise their kids.
It's hard, but hey I make ~100k in this expensive town, I have 20% down + 1+ year of living expense + 1 child (and we'll prob. have another one in a year) + one spouse stays at home. If I can do it, then there are a lot of other people out there who can to.
It requires sacrifice . . . and if you aren't willing to sacrifice then you shouldn't be a parent.
(end massive totally inappropriate rant-and I will not respond to any followups as it is not appropriate for this forum.)
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