One of the byproducts of the credit crunch has been the elimination or drastic reduction in loan products that allow a down payment of 10% or less, the reverse of the trend seen just months ago. People still want to buy homes in the US and will continue to do so.
However, if the national median sales price is about $220,000, that means a down payment increase of $22,000 (ie changing from 0% down to 10% down). If we say the average household income is about $45,000, that adds a few years, not months, to the time it takes to save for a down payment.
Enter the transition period between immediate gratification and saving for a down payment.
We are now entering a transition period that defers a portion of potential purchasers from an immediate purchase until they have the ability to save up for the downpayment. This will keep transaction counts surpressed for the next few years.
In effect, the no money down loan product types allowed homeowners to move the decision to purchase from some point in the future to today. In effect, lenders may have cannibalized future sales to sustain short term loan volume at the end of the housing boom in 2004-2005 (and guess which years of origination have the fastest growing default rates?).
We saw this in the auto market a few years ago. Carmakers offered rebates to encourage sales, but it had the effect of syphoning off a future purchases. I did that. Our car lease had six more months to go but we were solicited to go ahead and get a new car immediately and the old lease would be forgiven, even though we would have leased a car in 6 months anyway. We moved our decision ahead 6 months.
This will have the effect of prolonging weak demand for another few years I would think.
Tags: Commerce Dept, Census
It would be interesting to see data indicating the percentage of buyers who can be expected to obtain the 10% downpayment not from traditional savings but as a “gift”, job related bonus, builder concession, “piggy-back” loan, or inheritance (including one made in advance), for example. Having an idea of the percentage of future buyers expected to generate the 10-20% downpayment through the traditional savings model mentioned in your piece vs. those employing one of the above alternative means would be substantive in several areas. For starters, it would answer an interesting question: In terms of the downpayment, going forward what is the American path to homeownership? Will it be through a greater incidence of the traditional savings model or continuation of the alternative model? Or a mix of both?
I also think your post touches on another key issue which will rapidly come home to roost: the critical importance of the first time homebuyer primarily in the resale market. As we know, by and large first time home buyers provide the initial push or updraft in the market place which advances sellers/buyers up the chain. (Perhaps not as much in the luxury, second home, interval ownership or other discretionary sectors.) Clearly as you illustrate, if the first time homebuyer has difficulty generating the downpayment and/or faces challenges in a more stringent mortgage market, the much needed push will be dragging in a prolonged slack tide.
I see this as the No. 1 issue facing the residential housing sector. If history is any guide, solutions are likely to be in the form of more seller financing and more (subsidized) first time homebuyer loan programs. (Which brings me to another topic for another day: is too much focus being placed on shoring up homebuyers in or nearing foreclosure and not enough on programs which will get more properly qualified first time homebuyers into those homes and work off the high supply? i.e., sometimes the problem needs to be addressed not head on, but from a different angle.)