The truth about home down payments...right now
Filed under: Real Estate
With all the talk about the credit crunch and tough housing market, a lot of people are terrified of looking at houses because they're afraid they won't be able to get a mortgage. While it's true that credit score requirements are higher than ever -- somewhere north of 700 is helpful and subprime is a no-go -- a 20% down payment is not necessarily needed. This week The National Association of Realtors offered the following tips:- An individual may be required to put down 20% based on that person's financial situation. But that is not an across-the-board requirement for all borrowers.
- A borrower who puts down less than 20% is required to obtain mortgage insurance.
- Even in a declining market, a borrower is required to make at least a 5 or 10% down payment.
- FHA requires a 3.5% down payment by borrowers, so long as they meet a 31% housing cost-to-income ratio. In other words, anyone who stays within their budget and who can afford a 3.5% down payment (even with family help) can become a homeowner.
Reader Comments (Page 1 of 1)
1-03-2009 @ 8:39AM
Luke said...
Look at the FHA front end ratio of 31%, and then figure the average income of Americans. This will explain why there is an economic meltdown in this country. The median income of the american household was $50,000 in 2007. Now do the math; 31% of $50,000 is $15,500. This means that the median American family can afford a mortgage principle and interest payment of $1291. that means that if you include mortgage insurance, property taxes, water/sewer, and homeowners insurance, the median american household can afford a house that costs $150,000. Until recently, the median priced home in the US was $219,000. There is a gap of approximately $70,000 between what people bought, and what they could afford.
The are about 116,000,000 homes in the US. Multiply the homes by the average gap between what people could AFFORD and what they bought and you have a staggering amount of debt amounting to $8,120,000,000,000. for those of you who don't want to count all the zeroes, that is 8 trillion dollars!
The entire real estate boom over the last 13 years was nothing more that a Ponzi scheme. As long as there were buyers that wanted to jump on the escalating real estate price train, prices continued to increase at a phenomenal rate. Exotic mortgages became the norm, and the ratios of debt to income went right out the window. Everybody became a real estate speculator. Along with real estate, auto prices skyrocketed as well, with $60,000 SUVs in the driveway of a $400,000 home purchased by a family with $50,000 of annual income.
Guess what? The bills came due for the median American family and they couldn't pay them. They had to sell their house to pay the bills because they couldn't refinance the house that they lived in, because there wasn't any equity left in the home.
There were no more buyers for these overpriced homes, so the prices began to drop dramatically, and the piggy bank that that the American family had been robbing to live a lifestyle they never could afford, was empty! more and more houses came on the market and the prices dropped even more. People started to default on the mortgages. banks forclosed, houses became vacant, and values continued to drop. In the month of November 2008, home prices dropped 18%.
There isn't a credit crisis in America, there is a fundamental problem with value. People cannot purchase what they cannot afford pay for, and it is as simple as that. Look at what is happening these days; no one can afford to buy a $65,000 GMC Denali, they CAN afford to buy a $13,000 Toyota Yaris. That is because they CAN afford a $260.00/month payment. The same principal applies to home prices, regardless of what the NAR says. When home prices come down to a level where people can AFFORD the payments, people will buy homes again. The front end ratios will work properly, and people can live in the home they purchase, AND not be house poor.
The bad news is that there are a lot of people out there that are upside down on the homes they purchased. that means they owe more than the home is worth. Sometimes, WAY more! When the median priced home in the US returns to $150,000, the economy will begin to return to normal. Until then, hold onto your piggy bank, if you still have one!
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1-12-2009 @ 1:36PM
Steve said...
Luke, I don't deny that many people were living beyond their means. But I do take exception to the fact that you believe that home prices are still too high. Your analysis is extremely simplistic and does not take into account hundreds of other market factors.
Did you know that many builders are going out of business because they can't build a home for what they are now selling for? The average price of milk was only $1.99 in 2006. It went up to $3.09 in 2007 and an average of $4.31 in 2008. A 116% increase in only two years. Was this a ponzi scheme too? No, costs have surged for fuel and petroleum-based products and for the corn used to feed dairy cows (a side effect of an increase in the production of ethanol). Home prices escalated for a number of reasons, just as milk and millions of other products increase.
My wife and I purchased our first home back in 1994 for $140,000 and we had a 10% interest rate. Our payment with taxes, insurance and mortgage insurance was over $1500 a month. With the interest rate currently at 5.5%, I can get the same payment today on a $225,000 home. 60% MORE HOME FOR THE SAME MONTHLY PAYMENT!
You also make some BROAD assumptions about what people can afford. Just because the median income is $50,000, it doesn't mean that $15,500 is what they are able to spend on a home each year. My parents have worked all their lives and are part of the 76 million baby boomers that are reaching retirement. They make under $50,000 a year but are able to afford a considerably more expensive home because of their downpayment and years of savings. And what about other factors? Is a $1300 payment as big of load for a single person making $50,000 as it is for the dual income family making $50,000 that has 2 kids, 2 cars, child care, and more mouths to feed?
Exotic mortgages were only a small portion of the total market and the current foreclosure rate stands at just 1.033% of all properties in the US. Do you have any idea why Detroit has the highest foreclosure rate in the nation? It isn't because their homes appreciated more than anywhere else in the nation or because there was an over abundance of "exotic" mortgages. (I'm also going to assume that there wasn't a huge amount of speculation buying in Detroit.) It's because people are losing their jobs.
Housing could not continue to rise in value the way that it did from 2004 to 2006, but the larger problem was the price of oil. It is a cost that is factored into the production or transportation of almost every product we use. It won't be a $150,000 average home price that gets this country back on track. The economy will return to normal when the American public regains it's confidence and stops listening to doomsayers that choose to give only one tenth of the real story!
1-04-2009 @ 4:00AM
PulSamsara said...
"The entire real estate boom over the last 13 years was nothing more that a Ponzi scheme."
see comment above...
For me ,'Joe 12-pack', this whole financial meltdown fiasco has been a blessing... just for re-introducing the term 'Ponzi-scheme' to the American dialog.
'Ponzi-Scheme'... I love it...
now let's all collectively screw things up so bad that we have to invent a term like... oh, I don know..
'Chochi-Scheme' ! yeah !
and then as "the telephones are screaming as the whole metallic structure starts to burn" we can all unleash the inevitable:
'Fonzi-scheme'
ewww - the thought of it.
Aaayyyyyyyyy ! ; )
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1-03-2009 @ 10:57PM
Grumpy said...
Luke, you are spot on. Unfortunately all the educated individuals in the Govt. and financials still don't get it.
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1-05-2009 @ 10:31AM
Larry said...
To Steve. Same old Modern Math The 1994 house @ $ 140 K is now $ 350 K Does not look like 60 % MORE House for the Same Payment. Seems to me that You can buy much less house for your Payment. If you like the idea the idea that you live in a 225 K
House better than a $ 140 K house Thats great. Fact is you in Fact went Backwards,, Not Forward. Bottom line is you can only pay for what you can afford. I could stay in a $ 500.00 per Night hotel for 1 Night, Does not mean I can afford to buy the Hotel
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1-12-2009 @ 2:52PM
Steve said...
OK Larry. I'll play your game. I don't know exactly what a $500 a night hotel has to do with what you can afford, but I'll try to explain what I mean. What you can afford is the payment you are able to make each month. It is determined by the individual. You may have other personal and family obligations that make what you can afford much different than what I can afford even if we make the same amount each year.
The EXACT same home I purchased in 1994 for $140,000 is listed TODAY for $159,000. Assuming I pay asking price, that is only 1% appreciation each year for the last 14 years. If you factor in the current "value" of a dollar, that home should be selling for $200,671 if it just held it's value in line with inflation. So realisticly, the actual price has fallen over 20% in real dollars.
Now, if I can afford a $1500 payment, I can AFFORD a larger home because the interest rate is currently 5% and not 10%. My total payment on a $140,000 in 1994 was just over $1500. TODAY, I can get a $225,000 home for the SAME PAYMENT of $1500.
I'm sure that there are areas of the country where a $140,000 (back in 1994) home is now going for $350,000. But, wages have also increased. I'm sure you're not making the same amount you were back in 1994.
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4-01-2009 @ 8:50PM
tattatu said...
A $140,000 home in 1994 is only worth the cost of replacing it with a new home. The $165k home I sold in 2003 for $450,000 is now worth $195k, that is if you factor in the appreciation of the property. Sure you can buy only what you can afford, but the chances of a home appreciating in this market are slim to none. I'm hedging and making offers below the market for desireable property. No bites yet means the worst is not over.
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