Is That a Problem? | Feb 13th at 11:23am
Austan Goolsbee notes that if we required 80% loan-to-value for all mortgages, then we wouldn’t have any of these problems. But he adds that if you require all buyers to put 20% down, then you’re basically saying, here are a lot of people who can’t get houses now.
I can’t tell if he thinks that’s a bad thing, but my reaction is, so what? Housing investments, as we have learned in recent years, are risky investments. A home is a much different animal from, say, a mutual fund. Buy a mutual fund and you’re diversified, but you’re also not leveraged—you can’t end up losing more than you put in. That’s not the case with a home mortgage. Homeowners are very vulnerable to economic shocks, and I don’t think there’s anything wrong with limiting purchases to households who have enough cash on hand to make a 20% down-payment.
There is a sense in America that renting is a second-rate housing option, and our public policy reflects that. Given what our public policy hath wrought, we may need to conclude that for most people, including those who are well off, renting is often a pretty good decision.
Ryan Avent is an economics writer living in Washington, DC. He authors The Economist's economics blog, Free Exchange, and covers environmental and urban policy issues for Grist.
hj in Delaware on Fri, Feb 13, 2009 at 12:04pm
If, AG was talking about homes @ 1/2 the price because of energy-efficient design and size related to use, then a lot more would be “affordable”. The dwellings built in the last 1.5 decades are energy guzzlers intended to be either filled with stuff or flipped. Let’s get more precise about issues and answers.
BTW “who” decided that the way for USA business to sell what we want consumers to buy was by indenture through home mortgage instead of paying folks (consumers) for their work at a rate high enough that would allow them to make purchases?
Hal in Indianapolis on Fri, Feb 13, 2009 at 12:11pm
I think if you factored in an income exemption, then I would go for it. I have the income to handle paying on a home even if housing prices turned me upside down (two, in fact, I timed buying my home and putting my condo on the market so perfectly (sarcasm) that I now have two homes to afford). To restrict me from purchasing a home doesn’t allow me to make the financial decisions I feel should be mine to make (same decisions the other 80% of the loan in your scenario is based on, is Y likely to be able to continue to earn X amount in the forseeable future).
Existenz on Fri, Feb 13, 2009 at 12:23pm
I know one thing—if we had required 20% down over the last ten years, the housing bubble would not have happened and the banks would be on MUCH steadier footing right now. We have too many homebuyers with no skin in the game, and the banks absorb all the losses when things go sour.
It would be too much of a shock to the system to require 20% down right now—but we should require 5-10% at a minimum right now, increasing it as the economy stabilizes.
Mo on Fri, Feb 13, 2009 at 12:52pm
One problem is that the housing stock built in the last ten years (or more) was priced too high to be afforded by the wages paid to actual American workers. For all the squawking from people about folks buying more house than they could afford, nobody was out there building large amounts of non-shitty affordable housing.
They handle this in other developed countries by strict regulations on land use. In Germany any appreciation in value through the rezoning of land goes directly to the government, not the developer.
Stuart Zechman in New York, NY on Fri, Feb 13, 2009 at 1:21pm
Austan Goolsbee notes that if we required 80% loan-to-value for all mortgages, then we wouldn’t have any of these problems.
“These problems” aren’t simply a matter of soon-to-be-in-default mortgages themselves, they’re really a necessary product of a market for securities.
A 20% down requirement is a long way from simply prohibiting the securitization of No-Income-No-Assets debt.
Why not prohibit ARMs instead, since that’s the real reason for so many defaults on properties that people planned to sell upon adjustment?
Why not prohibit the co-mingling of higher and lower risk in debt-based securities?
Why not prohibit the repackaging of debt into opaque financial products?
Why is the solution to regulate how much money regular people are allowed to put down on a house, instead of simply regulating debt securities markets and securities insurers?
What does “homeowner” vs “renter” have to do with anything?
There are plenty of cases to be made for home ownership, none of which have to do with macro-economics.
I just don’t understand why this is even the third or fourth regulatory place we should go in order to prevent the future replication of current events…
Dean Hacker in Irivine, CA on Fri, Feb 13, 2009 at 1:24pm
The premise of mortgage backed securities was that they were abnormally stable, because home owners were highly likely to make their debt payments. However, the profile of the low-risk home owner was vastly different than what we saw in the Great Housing Bubble. The low-risk folks had an 80% LTV, were committing to payments that were around a third of their provable income, had a good credit history and were locked into stable interest rates.
The paradox of the bubble is that those folks probably received the fewest rewards from the explosion of mortgage backed securities. Wall Street priced the risk associated with borrowers who did not meet that profile almost absurdly badly. I mean, isn’t a home owner taking out a 5/1 ARM much riskier than one taking on a 30-year fixed? Isn’t a home owner taking out an Interest Only loan more risky still? Isn’t a home owner who finances their down payment with sub-ordinate debt the riskiest of all?
Where was the risk-premium for these folks defaulting?
Nik in San Diego on Fri, Feb 13, 2009 at 1:28pm
The problem with a 20% down payment is that it becomes nearly impossible in a market like San Diego (or most of southern California, for that matter) to buy a first home. The houses here are so expensive that in a “normal” market, most homes appreciate more in a month than people are able to save for a down payment, especially when they have rent to pay, etc.
One of the reasons why owning a home with a monthly mortgage payment that’s larger than a monthly rent amount is that you can’t deduct your rent from your income at tax time. If I can afford, say, a $1300/mo apartment, I should be able to afford a $2000/mo mortgage payment, since the difference is how much more of my income I get to keep to make that $2000/mo payment.
So yeah, I don’t think that it makes sense to explicitly require a 20% down payment. But lenders need to make sure that the total monthly mortgage is reasonable given the borrower’s income.
Jamie on Fri, Feb 13, 2009 at 1:44pm
This is no longer the case for many homes, and in another 6 months with things back to their 2002 levels 20% down payments on a home (a small one, but a home) should be in line with 12-18 months of salary for a median income earner, which is perfectly doable. This 20% appreciation by month was never normal, and is completely unsustainable for the reasons we are now seeing.
OTOH, I don’t think FHA should be repealed, but FHA should probably be curtailed in markets that have such ridiculous prices over the median income.
Sam Jackson on Fri, Feb 13, 2009 at 1:48pm
Maybe a compromise…requiring a minimum of 20% for the portfolio, while allowing for individual loans to vary;
We’d of course have to reset the portfolio value during times like this….maybe that would trigger a write down of the value of the loan as the assets behind them plummeted?
Stuart Zechman in New York, NY on Fri, Feb 13, 2009 at 2:02pm
in another 6 months with things back to their 2002 levels
In Manhattan, where I live, things are not likely go back to their 2002 levels—short of “Escape From New York”-type apocalypse. There are always real estate firms and concentrations of wealthy people to keep demand high enough to sustain 2004 or 5-ish pricing, if not all the completely wild seller demands of 2007.
If things went back to 2002 levels in my neighborhood (the East Village), it would completely defy the value of the past six years of improvements in quality of life to where I live, primarily due to all of that investment.
Dennis on Fri, Feb 13, 2009 at 3:08pm
20% down payment required, 30yr & 15yr fixed terms only, and we will never have this problem ever again.
In other words, go back to the same standards and terms that we had for balance of the 20th century.
fuyura in chicago on Fri, Feb 13, 2009 at 9:24pm
One absolute necessity would be a much greater variety of housing stock: there is a need for single-family homes and for apartments, and also for duplexes, 4-6 plexes, rowhouses and so on. We have somehow been locked into new building of single-family McMansions, and some high-density apartment complexes which are often looked upon almost as projects by the fearful who know only the suburban development.
It would also require much more openness in large parts of the country to the idea of renting as a stable choice—I’ve been renting for my adult life; my career has necessitated moving frequently, and over the last 30 years apartments have become rarer, more expensive, more uniform (pseudo condos centred around the pool and fitness center) , and much more odd as a lifestyle choice among my peers and colleagues.
Perhaps some sort of national tax break for various kinds of zoning, both for the residents, and for the developers/builders.
Jamey on Sat, Feb 14, 2009 at 7:50am
Boutiques and eateries are often economic bellwethers in both good times and bad. These “quality-of-life” improvements you speak of? Do they actually improve the quality of one’s life, or of the lives of those with money to burn?
I lived in the East Village before 2002: The fabulousness of the neighborhood is a VERY tenuous thing; many smaller entrepreneurs have been forced to move on to other up-and-coming neighborhoods, leaving EV to the Starbucks, Whole Foods, and Dean and Delucas of the world. Not bad in the traditional sense—again, quality-of-life: enhanced by a business with high standards for physical appearance. But now EV and nabes like it are beholden to decision-makers with no actual connection to the place; the decision to pull up stakes in bad times now is simply based on a show of hands.
Is it really that hard to imagine 9th St. Boulangerie ending up like Christadora House—a symbol of things gone totally out of whack? Trust me on this: EV had a GREAT quality of life when one could get a 1BR for under $250k. Yes, it was a little bedraggled-looking, but in many ways, it was a better place to actually live six, eight, or ten years ago.
Patrick on Sat, Feb 14, 2009 at 11:06am
I think 90% Loan to Value is kind of the marijuana of home loans. The ‘grownups’ tell you that anything under a 20% down payment is risky, but you try a 10%, just to check it out, and realize they were flat out lying to you; there’s virtually no risk in a 10%er at all. So you think, if they were lying about that…and you go on to 5%, and 0% down, and none down, interest only with teaser initial ARM rates, feels so good you just need one more hit…and you are out of control at this point, but you don’t realize it until it’s too late.
So yeah, some people would say that line of reasoning says 10% should clearly be against the rules, and others would say that reasoning supports 10% being legal.