20% minimum downpayment to buy a home

To clarify my position, the CFMA 2000, and FMA 1999 were game changers that made the gone-to-lunch (nice) lending standards possible. From a policy standpoint they are what must be undone if we are to have any hope of avoiding a Part Deux. The current fin reg reform is a placebo to give pro-banker politicians political cover in 6 months.

When everyone believes they can financially engineer away risk through financial derivatives and credit default swaps, all gate-keepers to credit accept more risk.

The MRIS statistics for April 2010 show that another housing bubble was created in the Baltimore City market. Year-over-year increases of 10% (average price) and 16% (median price) demonstrate that the housing tax credit and the easy-money GSEs have spawned unsustainable, out-of-control price increases.

There aren't enough trades to say whether the 16% "increase" is an actual increase or not. No doubt the housing tax credit has had an impact in stabilizing the market. But MRIS reports only broad averages, not "same house" increases. The increase can come from there being almost no low-end houses sold in the past year (much tougher for those buyers to qualify nowadays).

20% downpayment; 10-15% only for the first-time buyers in certain income range/geographical areas. 20% across the board in the current situation would price out too many first-time buyers (especially families with young children) who didn't jump on the housing bubble/tax credit wagon and whose savings have been losing value on the savings accounts.

IP Frehely said "The increase can come from there being almost no low-end houses sold in the past year (much tougher for those buyers to qualify nowadays)."

This assessment of the market is belied by the MRIS statistics, which clearly show plenty of low end homes changing hands in Baltimore. And why wouldn't they be--the government is giving away an 8% discount on a $100,000 home.

I'm less concerned about down payment requirements and more concerned with making sure mortgage qualifying standards are no more than 33% of your gross income, preferably 25%. That would keep buyers and prices "honest".

Robin,
I agree with your assessment as rule #2. But hefty downpayments and having "skin in the game" would likely filter out the speculators and fiscal irresponsibilites.

Jelena,
I agree with you 180 degrees. Those with best credit should have to put down 20%. Those who are riskier should have to put down more. Like grandma said - if you can't afford it, you can't have it

Interesting point about the mix of housing sales accounting for MRIS's 16% year over year increase for Bmore. Case-Shiller (the gold standard of home price indexes) tracks same home sales to control for this. I can't find Bmore data, but Feb data for DC was showing a 5% year over year increase. Notice the up tick towards the end of the first graph corresponds nicely with the Fed's decision to force mortgage rates down and the start of the big tax credit that just ended. I'm not sure if that necessarily constitutes a new housing bubble, but it certainly exceeds the longterm real growth rate outside the bubble years.

http://blog.redfin.com/washingtondc/2010/04/case-shiller_low_tier_home_prices_fall_off_in_february.html

Here's my take on this fiasco; there is definitely a hierarchy to the calamity of events.

First, Congress passes many bills without reading, much less understands, the legislation. Anyone that notices that Congress is about to pass an omnibus bill should be very leery of the bill's contents. BTW, omnibus spending bills are more common than the general public realizes. If you hear Continuing Resolution Authority (CRA) assume that it will eventually be followed by an omnibus spending bill. See point four regarding the 2000 CFMA, which was embedded in a 2001 Fiscal Year spending bill.

The second, The Community Reinvestment Act, which pretty much required banks to provide loans to virtually everyone in the community in which the bank operated. (SEC. 802.(a) The Congress finds that— (1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business.)

The third, lack of Federal Government oversight of Fannie Mae (FNMA) and Freddie Mac (FHLMC). Given that these two Corporations were, and still are, Government Sponsored Agencies (GSA), both companies were/are subject to undue government influence, specifically Congressional desires. Also, CDO's, a key tool for GSA’s, make it difficult for the mortgagor to renegotiate a loan in default.

Fourth, as the article points out; The Commodities Futures Modernization Act of 2000 (CFMA) legalizes the previously illegal activity of "gambling on Wall St." 60 Minutes presented this issue in rather stark terms; http://www.cbsnews.com/stories/2008/10/26/60minutes/main4546199.shtml. It is interesting to note that this type of gambling was previously outlawed because it brought about the stock market crash of 1907. Now with two crashes attributed to this activity the present administration doesn’t want to outlaw it, instead it wants to regulate it.

Fifth, as the article points out; The Financial Modernization Act of 1999, which was the basis for the deregulation of the financial system.

Sixth, Mark to Market Accounting (MMA) standards, specifically FAS 157 issued in Sep 2006, which pretty much did away with historical cost accounting for long-term financial derivatives. Small and local banks such as savings and loan banks and credit unions that did not sell the mortgages they underwrote were not required to use MMA valuation.

Seventh, moving retirement savings from company sponsored retirement to market based individual retirement provided financial institutions with more dollars to leverage. Much of an individual’s retirement is in index funds that consist of financial sector stocks. I’m not suggesting that individual retirement accounts are not preferable to company sponsored retirements, I’m suggesting that this shift placed more responsibility on the individual to better understand what “exactly” their retirement is being invested in, as well as an understanding of the competence of their financial advisor.

Finally, what I would suggest is that gambling on any type of financial transaction should be illegal (repeal CFMA) and that the financial banking system should be re-regulated to provide the average individual with a vehicle to park their finances without having to have expert financial knowledge or expertise. The average American doesn’t have a lawyer so they should have to have a financial advisor. Why save money if there isn’t a reasonable expectation that those savings will be there when you need it and at a valuation roughly equal to the value when originally saved. In hindsight the 50's and 60's 5 ¼ % passbook savings sure looks like a sweet deal.

The long held standard is a 20% or more down payment. Anything less would require mortgage insurance. In the Eighties FHA required at least 10% down to qualify, and of course you had to pay FHA insurance. From what I remember VA was between 0 and 3 % down, but you had to have served more than 180 days in the active armed services.

The bottom line is that many, many things attributed to the housing bubble, in fact housing was just a target of opportunity. I recall having many conversations with people much smarter than me who had moved on to real estate immediately after the tech bubble. The hot stocks at that time were REIT stocks and real estate development companies.

Just read Michael Lewis, The Big Short. The chapter where a legal immigrant, a strawberry picker w/ an annual income of 14,500 was able to be pre-approved for a 750k home says it all.

Tax the capital gains from home sales at regular income tax rates. The tax code is unfortunately an exercise in social engineering: You tax something less, then of course you get more of it. Individuals, families and businesses are generally rational economic actors. While this may sound good from a federal tax revenue standpoint, it may not be: A lot of people are currently sitting on paper losses. On the other hand, this would allow them to move, assuming they are not also under water in their mortgages. The federal deficit hit on restoring the taxability of the gains and the deductibility of the losses is that most people don't have huge capital gains sitting around elsewhere to offset the loss on their home.

Why is this such a big deal? TRA97, or the Taxpayer Relief Act of 1997 (one of several overlooked Clinton tax cuts) was a major cause of the residential real estate bubble. Prior to TRA97, homeowners had to carefully track their "basis" during the whole time they owned their home. Receipts were necessary for every home improvement. Upon home sale, the seller owed a capital gains tax on the sales price minus the adjusted basis of the home. The IRS and many others said this was an almost impossible compliance task for long-time homeowners. Then there was the complicated exception for retirees who could postpone their capital gains liability when moving after age 55.

TRA97 changed all that. A single homeowner would owe no tax on gain of $250,000 or less. A couple would owe no cap gains tax on gain of $500,000 or less. No documentation of basis is necessary. You just need to hold the home for two years and/or live in it for at least two out of five years. My boss' daughter married a guy whose full-time occupation was buying fixer-uppers and then selling them every two years -- he hope to net a million dollars after only 10 yrs of doing this. He certainly wasn't alone. The downside to this change was apparent after 2006 -- home sellers could no longer deduct capital losses on home sales!

In summary, TRA97 did more than anything else to change one's home from a place to live for 30 years to an "investment" that could be flipped every two years.

I've read some reports that the tax credit has boosted prices for sub-200K housing by $40,000.

I think the other thing that's boosting median sale prices more than actual comparables is the large number of tear-down's in the close-in suburbs.

Darwin Rules, I'm all for the fiscal responsibility and such, but in the present conditions for the state of Maryland 20% downpayment would most likely mean exodus of younger workers (including our family) into the states with the more reasonable real estate prices. Not sure if anyone cares but I'm guessing the state could use some revenue...

Jelena, you are probably right. A higher down payment requirement would knock out many people from buying a home. If that happens, then there would be even less buyers in the market. That most likely would push prices down further as sellers will have a hard time unloading at higher prices. The only way to get those people back in the market would be with lower prices.