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The resurgence of the low down payment market
The dramatic rise in FHA insured loans in a time of historically low rates demonstrates two key aspects of the current American economy. The first point is that many US households have the inability to save for an adequate down payment on housing. Forget about the historical 20 percent down payment but many households cannot scrimp up even a modest 10 percent down payment. The second point is the American economy is still living on leverage. Debt is an elixir best served in moderation but as we are seeing with the low mortgage rates, the country is now setting a threshold where low rates are expected. As a case and point we now see FHA insured loans playing a major role in the housing market. Since Q2 of 2007 the number of FHA insured loans outstanding has more than doubled. This would not be such an issue if they weren’t defaulting in mass.
FHA the nostalgic bridge to easy money loans
There is little doubt that FHA insured loans are plugging the bottom end of the market. FHA loans were never intended to be a major player in the overall housing market. In a recent MBA survey that covers roughly 88 percent of all outstanding mortgages we find the following:
FHA loans outstanding
Q2 2007: 3,030,214
Q2 2012: 6,827, 727
In this short period of time, FHA insured loans more than doubled. The benefit? FHA loans require a miniscule 3.5 percent down payment and this is what most typically jump into the market with. Nonsense chatter that people go in with more down payment funds is just not shown in the facts. Most people that use FHA loans use them for the following reasons:
-Lack of down payment funds
-Maximum leverage to squeeze in
-Little risk
FHA insured loans essentially function as a call option on a home. Think about the fact that selling a home will cost a home owner roughly 5 to 6 percent so right off the bat FHA buyers are already in a negative equity situation when selling costs are factored in. However, with such little skin in the game should home prices drop dramatically people have less of their money at risk. Why else would demand for these loans be so high? You can get a conventional mortgage with 20 percent down, fantastic rates, and no mortgage insurance. Mortgage insurance is now getting more expensive because of rising defaults. Don’t think this is true? Let us look at serious delinquency rates across mortgage products:
While prime mortgages have a serious delinquency rate of 4.98 percent FHA loans are up to a stunning 9 percent. This is incredibly high given that this is a loan product that has been booming recently. Subprime loans are a dwindling segment of the mortgage market. In 2007 subprime loans made up 14 percent of all outstanding loans whereas today they are 9 percent and moving lower. However, FHA loans in 2007 made up 6 percent of all loans and are now up to 16 percent of all outstanding loans. We should be concerned about the delinquency rate because we will be on the hook for this. Of course it should come as no surprise that many that can barely save 3.5 percent to buy a home are more likely to encounter financial problems and increase a new category of distressed inventory.
Home prices nationwide are being supported by low interest rates and low down payment products. For example, let us run the monthly payment for your typical nationwide home:
Given the $50,000 typical household income an $180,000 home with a 3.5 percent FHA insured loan doesn’t look like it will stretch the budget too much. Run the figures for a $500,000 home in California:
Notice how high that PMI is? This is how many in SoCal are squeezing into places and creating bidding wars with the low inventory that is being seen on the MLS. The low inventory is not a creation of a booming economy but by number games being pushed by the Federal government and Fed. The fact that over 9 percent of FHA outstanding loans are seriously delinquent (nearly 7,000,000 total FHA loans outstanding) should we simply continue giving out low down payment loans for the sake of getting people into homes? Clearly something is up here because prime conventional loans with higher down payments are performing much better.
As we discussed in a previous article low interest rates are already hurting households in other less obvious ways. How long can this last? Hard to tell but the fact that mortgage insurance rates zoomed up this summer in a hot selling season should tell you that the underlying fundamentals of the economy are still shaky. Also, if FHA insured loans were such a good deal why don’t you see Wall Street banks jumping in to make 3.5 percent down payment loans with their own money to the American public? Currently the entire mortgage market is fueled by government backed products.
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In the last couple of weeks here in Los Angeles I am hearing on the radio ads for an upcoming seminar for people who are serious about wanting to learn how to flip houses. Flip houses? In Los Angeles?
Sounds impressive, but c'mon...it's cardboard!
They must mean with a crane, a forklift, and a giant spatula.
most people do not undertand : interest rates high = good time to buy........interest rates low = bad time to buy
Interest rate == desperation meter.
Most people don't understand:
This planet was originally a gift to us all, now we got to pay for every square inch.
Only because some greedy bastards a long time ago decided they deserved to own it and we should pay for the right to be on "their" earth.
So - consider a specific piece of property that multiple persons wish to settle on. Which is the better way to decide who of the many gets the land: a fight to the death til only one is left standing, or charge a price so high that only one of the many can afford it?
Our current worldwide economic situation should be proof enough to you that man, when left to his own devices, does not create nirvana.
When interest rates go up, the house value will go down. You will be paying 'principle' payments to lost value.
Was this a test question?
I prequalified for a first-time mortgage of 2.5x my documented salary, 95% LTV at a nominal 3.49% 30-year fixed thru my credit union. PITI would run about $200/mo more than my current rent (which would still come in under 25% of my take-home net monthly salary), before any tax consequences are taken into account, for a house that's about 75% larger on 12x the acreage.
Why shouldn't I do that?
I think you made a good decision. As long as your job is secure.
I sold myself on the idea of getting just on the outside of town and converting my $200K of fiat and going on the hook for $300 @ 3.35%/ 30yr into something physical besides silver and gold.
Did I fuk the pooch?
I guess we'll find out
"Did I [screw[ the pooch"
Probably. Home prices will be falling for years. and if you decide later to sell: "Forget-about-it" since their are few buyers. Better to rent so you retain flexibility, especially if you need to move fast (job, soaring crime, etc).
PMs provide flexibility since you can easliy convert them into things you "need" to buy like food and fuel. Houses on the other hand are difficult to trade for food and fuel. PMs are assets rising in value. Home are declining in value while costs (heating, electricity, and taxes) are all going up!
IMO if TS is really gonna HTF, you can't put solar panels + battery + generator, a water well, cisterns, a gun vault, a greenhouse, a chicken coop, and adequate food storage on a stack of precious metals. And fortifying a rental? That's fucking madness. Everyone needs some place to live, and enough space to keep some dogs happy, and I'm choosing some land and a house in an unincorporated rural area in commute distance to work.
oh yeah I plan to pay this sucker down in 8-12 months max.
If we undergo inflation, paying down a low-interest debt early in more valuable fiat is not the way to go. Paying debt down makes sense in a deleveraging/deflationary environment, but if you believe inflation is coming the move is to get as much cheap fiat at the lowest interest rates you can, and convert it into useful stuff like ammo, sundries and food stores, energy/water independence, etc.
Assuming that you are first time home buyer because of the first-time mortgage, because:
1. Unforeseen costs and expenses. Shit always happens. When you encounter a necessary expensive repair, you will be stretched too thin.
2. Why do you need 75% more home - go for a smaller home in the best location you can afford and forget the big acreage. If you lose your job, then you have a better chance to sell the deal quickly and minimize your losses.
3. You are stretched too thin from the get-go: 15% down; 20 year amortization with extra payments to discharge the mortgage in 15 years.
4. The risk (that housing prices will continue to go down and the costs of ownership (real estate taxes, insurance and repairs) is greater than the reward (locking in a house with a low interest mortgage and higher future home prices).
If you still want to go for it, please spend about $250 and walk the house with the smartest independent engineer or contractor you can find - do not take anyone recommended by a bank or an insurance company. You must uncover all hidden defects before you close the deal.
Because you want the same house for 80% of the current principal at 2.99? ;)
Trick question? If you expect to hang around for a few years and your competent to do the standard fix-it jobs then buy the house.
+1
The problem with home buying IMO is people believing they can flip them for a profit over night. You will always need a place to live, we sold our home right before the crash but we could not have sold it for several years and gotten our money back before then. I knew it was going to crash it made no sense as wages were not increasing sufficiently to keep up with the higher housing costs. For us it was a good thing to do since we lived in an urban area and didn't want to be stuck there but we then rented for a few years and that wasn't cheap it ate up a sizeable amount of money. We have since bought a place out in the country my point is it depends on how you view a home, i.e, investment or a place to live that you don't answer to or pay a landlord.
Good article, Doctor.
I'm still seeing zero down payment for $350,000 houses if you go to builders. They have their own "lender" who seems to know how to put together a package just for you so you pay next to nothing to get into that brand new box.
This is just one more reason housing will continue to drop. Handing out stuff to people who cannot afford it simply never turns out well. And this NINJA-style lending is very simila rto public housing and everyone knows how those neighborhoods turn out. Until at least 10% down is required, house prices will not stop falling and nothing will bring them back to their Bubble Heights.
The Suburban Slum Era Has Arrivedhttp://gawker.com/5853251/the-suburban-slum-era-has-arrived
http://realestate.msn.com/article.aspx?cp-documentid=21179977
But enough about Stockton, CA.
AZ,
When 10% down is required, house price declines will accelerate.
The market may decline more if 10% down payment is required but you would be selling to buyers who can actually afford the house. That would stabilize the RE market. The rate we are heading I am even seeing raw land prices sinking pretty fast. Otherwise, no end in sight as the man sayeth.
Hey, you wanna talk accelerated declines ? Wait until interest rates regress to the mean upwards to 7-8%. And historically, market forces ultimately win but it may take time.
Foaming the runway.
Lets cross the GM sub prime no doc loans pimped cars to bums and to illegals, and let them get a heloc 2nd at 150 % of sales price to use as a downpayment for FHA... then give em a 120% heloc on the house, ....
HOUSEING HAS BOTTOMED, hahahahahahah, go on hitler go buy that collector camaro.
your realtor was right, reeeeel estate, ....
and if they dont print wiemar counterfeit for 20% inflation; then walk burn em down.
remember, reeeel estate, its an investment, kick the can barney, kick the bank in the can....
You did not mention HOMEPATH.COM. Another Fed low down program.
ZIRP