No Money Down Buyers concern market

No down payment from nearly half of all new home buyers last year means trouble

One thing that has long been a problem for first time home buyers is coming up with a sizable down payment. Years ago, a twenty percent down payment was the minimum that most mortgage companies would accept when a buyer was applying for a home loan. More was better. In the late 1970’s, when interest rates were more than 15%, some mortgage companies were requiring even larger down payments in anticipation of a high default rate. 

Times have changed. Interest rates are down and lenders have become much more competitive and much more aggressive. In their constant efforts to win more customers, mortgage companies have invented a slew of new types of risky home loans designed to allow just about anyone to make a home purchase, whether they have a large down payment or not. In some cases, even no down payment at all.

A recent survey showed that nearly half of all first time home buyers put no money down last year. That’s a startling discovery, and it suggests a number of different things. All of them are bad:

• Housing prices are too high. Buyers are offering to pay what they can afford, but the amount of cash they have on hand is such a small portion of the purchase price that they don’t even bother.
• Employment, salaries and savings are down. It’s no secret that Americans are not saving as much as they used to. A number of factors have contributed to the fact that many buyers have no savings at all with which to fund a down payment on a mortgage. It could be bad lifestyle choices, but more likely culprits are underemployment and lower salaries. Most working class salaries, adjusted for inflation, are lower than they were a generation ago. This has an effect on the house buying process.
• The housing market may be about to burst. Home prices have been skyrocketing for the last six years, and there are many indications that this market is going to peak, if it hasn’t peaked already. The statistic that nearly half of all buyers are putting no money of their own into their homes suggests a lack of confidence in the market from the buyers.

Housing sales are now fairly stagnant in certain parts of the country that were recently quite hot. If enough homes go unsold for a long enough period of time, prices will inevitably fall. That creates quite a problem for anyone who did not make a down payment and who does not plan to stay in their house for the long term. A decrease in housing prices could mean that many people with no down payment will be living in houses that are worth more than they owe on them. That becomes a huge obstacle to trying to sell the house. Most people are accustomed to realizing a profit when they sell; selling a home at a loss creates all kinds of problems, particularly in California, where even a 10% deficit could mean a loss of $50,000 on the sale.

All of this could be an indicator of future trouble in the market, and it may be coming soon.