Tuesday, June 24, 2008

Whose Skin is It?

I thought I would discuss the pros and cons of down payment assistance since its been in the news so much lately.

First, I should note, that Mr.BT and I bought our first home in early 2002 with very little down. At the time, home prices were comparable to monthly rents and prices were increasing faster than we could save for a down payment. We had fully documented income (but not a long history) and good credit (but I can't remember how good).

For our situation, a low/no down payment made a lot of sense given the market conditions and our steady income.

Fast forward several years. Home prices are so high that even avid savers can't muster up the down payment. In this situation two things can happen, 1) builders and industry groups can subsidize down payments to get people into homes at current prices, or 2) prices can come down to a point where normal people can afford them with what they have saved up.

I obviously like the second choice, since it is a much more sustainable solution over the long term. It also means, as many opposition groups have noted, that people will have "skin in the game." I am not sure we are doing low income or minority groups any favors by getting them into homes using down payment assistance. At current prices, its cheaper to rent a home than to buy in most locations. And buying is risky in a declining market, since even the slightest decline in value (I believe 3% is the FHA threshold) puts them underwater on their loan, and chances are, prices are likely to decline if no one else can afford a down payment.

As I have mentioned many times on this blog, I would rather see home prices drop to affordable levels for fixed interest, 20% down loans. Of course there are always exceptions. I have no problem with the government offering more lenient terms to first time buyers who have documented income (1-2 years) and good credit.

I know there are several first-time buyers out there.....are you more inclined to 1) look for low down payment options and purchase a more expensive home, 2) purchase a less expensive home with the money you currently have saved up, 3) wait till prices drop and you can afford a nicer home with less down payment.


sacramentia said...

If a first time buyer has documented income and good credit, they are well on their way to a comfortable life. I don't the rest of us should subsidize a home purchase for them.

Buying Time said...

I figure most bubble bloggers feel that way, however I would feel like a huge hypocrite if I totally opposed it.

We both put ourselves through college/grad school. With 100k in student loans to pay back, saving for a down payment was near impossible.

OntheSidelines said...

In 2005 I was one of those individuals that didn't think the market could sustain the growth. This coupled with a need to move out of state, prompted us to sell our first home and we have been renting ever since.

While I could have saved the money made on the sale, we paid off our large student loans instead.

Now that we are looking to buy again, it is like being a first-time buyer all over just without the perks. We are trying to figure out how to buy without much of a down payment, so I definetely have a problem "helping" anyone get into a home.

Jacob said...

I don't have problems with programs to help people buy, but they should have to come up with the down payment on their own.

I would prefer a program that would do permanent buy downs of the load rate or something like that.

But the buyer should have to come up with the 3% on their own, no seller gift BS, must have the money in their bank for x months to prove it was thiers.

Even at $300k, that 3% would only be $9000. If you cannot save up that amount over a couple years then you really shouldnt be buying.

For one thing it will cost you more to own then to rent, so if you cant save x dollars a month renting, how will you afford to own?

Ill be a first time buyer someday... Once all this nonsense is over with. Everything the government does to prop up prices will just make it that much harder for people the buy because the price is too high. I am just hoping we dont have the Japanese 15 year housing crash.

purplelabrador said...

I think this is a future problem.

Considering the cost of selling a house (6% commission alone), buyers who put down 3 or 5% are already upside down without any depreciation. These buyers have higher default rates because it's rational to default. Banks, builders and actual homeowners are desperate to sell, so there is plenty of pressure to find ways to get buyers qualified. I think many 2008-2009 buyers are the next round of foreclosures.

Max said...

Think of DPA programs as a subsidy for housing. What you're really doing with a subsidy is increasing demand for something, and increased demand always drive up prices. If you want to lower house prices, the best way would be to end all "affordability" programs and tax breaks, including the interest deduction. *ducks*

Patient Renter said...

I don't have problems with programs to help people buy

I do. People don't need to buy a home. Government programs that give them lower rates or subsidize their payments in one form or another look to solve one supposed problem (not owning a home) by creating another (adding to our national debt and/or defacing our currency). Government programs chartered with the mission of promoting affordability actually do the opposite via their subsidies.

Bottom line: the government has no business being involved in home purchases at all. Probably the biggest reason they are involved is because lots of big corporations and wealthy people benefit from their involvement.

Paul said...

Alas, making housing affordable is contrary to the gubmints goal of making folks think they are rich by owning appreciating assets (houses) and not thinking about how they much they are losing by paying social security taxes. If people "feel" rich by living in an appreciating asset, they don't spend as much time thinking about how they are going to afford to retire without other assets or income. What is the social and political impact of so many early boomers finding out their retirement savings (in their homes) has evaporated with the declining market?

alba said...

I'm looking forward to being a first-time buyer....again.

Sippn said...

AB, BT - you've tapped the subsidy 2x each.... you already owned a house, bought while low, I assume sold high and walked away with cash. Live in Serrano.

What really is your beef? It is really hard to feel your pain.

Buying Time said...

"What really is your beef? It is really hard to feel your pain."

Huh....I was just using my situation to show that 100%LTV and DPAs are not always a bad thing. Sometimes they help young folks get a foot in the door. They certainly helped us.

So I would feel like a huge hypocrite if I totally opposed them.....even though they keep demand artificially high as Max and others pointed out.

PeonInChief said...

I have no problem with down payment assistance programs. Most of the people I know who bought houses in the Bay Area did so with either one of these programs or assistance from the Bank of Mom and Dad. Down payment assistance programs help buyers who don't have rich relatives.

And the problem is not "skin in the game." The problem is that the house is worth $100,000 less than it was two years ago. I think Dean Baker pointed out that people aren't walking away because they're $10,000 underwater, but because they're $100,000 underwater.

norcaljeff said...

I don't think employers like Oracle, HP, NEC, etc who pay below the median income range for this area should be subsidized to get their employees into homes. Especially in light that they all received hefty tax breaks to relocate here only to burden the tax payers with low paying employees. They need to pay more or we need to cut off this funding. These programs were designed to help out people more unfortunate than those who have a college degree and a job at a Fortune 500 firm. Part of the current problem we have now is people who had no business buying homes getting into homes with the assistance of local governments. This helped artificially prop up this phoney RE market.