Lower Down payments: Boom or Bust!
“Yeah, we have a slow recovery, but it
appears to be going to continue,” Mr. Toll said, adding, “Why do we want to go
do what got us into this problem in the first place? … Three percent down
doesn’t make any sense.”
Mr. Toll concluded that lenders have
required a 20% down payment on top-rated mortgages for decades “and we had a
hell of a housing program.”
These are words from Founder and CEO of one
of the largest luxury home builders, Toll Brothers, Robert Toll.
What
is he talking about? Well he is reacting to the FHFA (Federal Housing Finance
Agency) announcement.
(
Federal Housing Finance Agency Director
Mel Watt announced a number of policy steps aimed at increasing mortgage credit availability
at the Mortgage Bankers Association on
Monday.
Watt
didn’t provide a great deal of specifics, but said that the FHFA will be taking
steps to further clarify lender liability in representations & warranties.
He also said that he supports the return of the 97% loan-to-value product at
the GSEs, Fannie Mae and Freddie
Mac)
Is he right; is it a bad Idea to go back to
the 3% down that was prevalent at the height of the housing boom? It does seem
to be a strange opinion, coming from a builder. Remember though, Toll Brothers
is a luxury home builder; his buyers are not in the financial situation that
they worry about the down payment.
Other builders such as Pulte Group CEO
Richard Dugas Jr said: “We are encouraged by proposed changes at
FHFA which have the potential to improve mortgage availability, particularly
for first-time home buyers.”
And Larry Nicholson, CEO of Ryland Group,
said: “I don’t think anybody is a proponent for going back to what happened
in 2006 or 2007 at all, but a little common sense goes a long way. I do think
it helps the entry-level buyer with the 97% (loan-to-value) program. I think
that will get some people off the fence.”
These different opinions from 3 prominent
home builders are interesting to say the least. All of us, especially people in
the Real Estate industry want to see the 1st time home buyer get
back into the market. But are we doing these 1st time buyers a favor
or a disservice by allowing them to get into a home with only three percent
down? Many of the buyers that lost their homes after the bust, never had a
chance to really pay for the home that they purchased, Most of them, were
really only renting those homes until the market collapsed. Part of the problem
was the low down payment. The more you have invested, the more careful you are
before you make the decision to buy. But the other problem was that the homes
that they were buying were just too expensive, if you can afford to pay $2000
per month in rent, and you are comfortable with that, why you would agree to
pay $3000 per month for a home purchase.
The bottom line is that if you allow
people to get into the home with a low down payment, then you also have to make
sure they do not purchase more than they can afford. That will be the only way
it will work for the long term. Now there were many reasons the housing market collapsed,
the low down payments were only part of the problem.
The reality is that the down payments
will be lowered, and it will open up the market to more 1st time
buyers. Only time will tell if the mistakes of the past will pop up again.
There will be more booms and busts in the housing market in years to come. Our
economy seems to thrive on enjoying the booms and digging out of the busts, but
the important part for an individual is to limit your exposure when the market
has its down side. Live within your means and don’t buy more house then your
pocketbook can afford.