The Housing Bubble

A weekend topic starting with The Street. “In the aftermath of the Great Recession, no-money-down mortgages got a bad rap, blamed for being part of a toxic brew of bad lending that crashed the real estate market. But in a bid to reach credit-worthy buyers struggling to save up thousands to secure a loan, mortgage lenders are experimenting again with very low down-payment mortgages. ‘There are significant barriers preventing people from attaining homeownership and one of the major barriers is the down payment,’ says Elliot Schmiedl, homeownership director for the Massachusetts Housing Partnership. ‘The days of saving up 20 percent down are long gone — now it’s 3% to 6% and people even have trouble making those payments.’”

“Low- or no-money-down mortgages are growing in popularity as the cost of buying increases. U.S. home prices have jumped 6.3% in December compared to the year before, according to the Case-Shiller index. Many zip codes, especially in the Northeast and on the West Coast, have long since blown past their 2005/2006 highs. And these mortgages are not just popular among low- and moderate-income buyers. Many professionals, such as doctors and lawyers, are also dealing with large amounts of debt but, with solid credit scores, make good candidates as well for zero-down loans, mortgage brokers say.”

“‘If you are not able to get into the market you won’t be able to reap the rewards of homeownership in the long haul,’ MHA’s Schmiedl says. ‘I think they (zero down loans) are good in that regard.’”

From the Idaho Statesman. “Affordable houses in Boise and Meridian seem to be fading into history. It’s getting tougher for average buyers elsewhere in the Treasure Valley, too. The median price of an Ada County house is almost $300,000 today, according to Boise Regional Realtors. In Canyon County, it’s almost $200,000. Both prices are record highs. The two counties combined had just 65 houses for sale for less than $200,000. Many were in Nampa and Caldwell. There were only a handful in Ada County, mostly in Kuna and Star.”

“Yet $200,000 is roughly what a median-income Ada County family can afford. The median family income in Ada County is $58,099, according to the Census Bureau. The median house price is $297,500.”

“A Boise buyer with that income and good credit who can put $26,000 toward a down payment and closing costs, who has $400 in monthly debt payments, and who still wants money left for food, entertainment and vacations, can afford a $215,787 home with a 30-year mortgage at a 4.72 percent loan rate, with a monthly payment of $1,458, including taxes and insurance, according to Nerdwallet.”

“Yet prices keep going nowhere but up. The supply of local homes for sale remains extremely tight as people who might have sold their home stay put and remodel instead. Multiple offers remain common.”

From Chicago Now. “You remember the subprime mortgage crisis, right? Skyrocketing homeownership levels, assuring everyone in America that they could become wealthy by participating in the American dream? And the ever popular narrative of evil bankers, forcing people to take on mortgages that they couldn’t afford to pay back? Soaring home prices, followed by a crash? Banks taking people’s homes? A government bailout?”

“Yeah, that wasn’t that long ago. In fact, it should be so fresh in everyone’s memory that we shouldn’t be trying to repeat the same mistakes all over again. Yet, there’s been a lot of hand wringing over the fact that mortgages have been harder to get for people with lower incomes or higher debt levels and homeownership levels are down to 64% from 69% at the peak of the housing bubble (which may have been a historic high). Consequently, last July Fannie Mae raised their allowable debt to income ratio (DTI) for low down payment mortgages from 43% to 50% under certain circumstances.”

“Well, 6 years ago I wrote about How Fannie, Freddie, And The Government Contributed To The Mortgage Crisis and it looks like they are determined to do it all over again. Just to put things in perspective check out Fannie Mae’s historic delinquency rates in the graph below from the Urban Institute. The black line represents the riskiest pool of mortgages with lower down payments and you can see how the delinquency rate peaked around 14%. Do we really want to go back there?”

“However, this time the private sector isn’t going to let these government sponsored enterprises suck them in and they may ultimately prove to be the only adults in the room. According to a Chicago Tribune article the mortgage insurers (the credit enhancers in the graph above) have raised concerns and are setting stricter limits on what they will insure.”

“You can just tell by the tone of that article that the wailing and gnashing of teeth about denying home ownership to tens of thousands is about to begin. But before you join that chorus consider that the American dream is not all that it’s cracked up to be. I’ve actually written about this before but some researchers with a little more credibility than me have once again shown that homeownership doesn’t build wealth. As that article points out, taking control of your finances does.”