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Giving The Finger To The Thumb: 20% Down Is Looking Quaint


I remember when I was in college (really, I do), thinking about how long it was going to take for me to buy my first house because the 20% down payment seemed virtually impossible to reach. I had a $25 savings bond from third grade that had matured, and that was about it.

Of course, I wasn’t the thriftiest person around, which made my prospects of homeownership even dimmer. Hey, I couldn’t help it if my first car cost the same as the annual salary of my first job out of college. After all, it was a 5-speed with a sunroof and aluminum alloy rims.

Syndicated columnist Kenneth R. Harney wrote an excellent article called 20% down seems like ancient history [LA Times] [1] about the topic. Here are two of the more salient points about the current mortgage market:

Nary a 20% figure in sight. That’s got to make private mortgage insurance companies very happy to hear. As a result of easy financing, homeownership reached an all time high at 69% a few years ago. It’s all about the payment these days, not the down payment.

As the article says, no down payment cuts both ways. In rising markets, the purchasers gain equity quickly. In a falling market, the owners can be mired in debt.

The cause of anxiety for many is that financial instruments and choices have changed significantly in recent years and the old rules-of-thumb are just that: old. However, this new heavy financing approach to home purchasing has not lived long enough to go through real estate cycles and prove itself as a good strategy, yet it seems to make sense for certain situations.

If a homeowner is “underwater” (home value is less than mortgage) then it comes down to how long they wish to stay in a property. Being underwater limits their options yet it may or may not have any impact on their plans. In other words, it’s not necessarily a dire situation. On the other hand, it can cause significant hardship if a homeowner plans to move and can’t afford to get out of their present situation. In other words, it depends on whether your loss is real or on paper.

I think a lot more scrutiny should be placed on individual investors who bought with interest only 1-year ARMs (and could barely afford the payments thanks to lax underwriting standards) and were looking to flip their property for a quick profit. Mortgage rates are now higher, the buyers have faded away (the ponzi scheme ran out of gas) and these investors can’t get a high enough rent to cover the monthly mortgage payment. I’d expect significant problems in “flipper” prone markets more than anywhere else, but expect it to be tempered by the fact that most of these locations have some of the highest employment and wage prospects in the country.

As an appraiser, I am always fascinated by how many people think there is some sort of handbook that lays out the adjustments we make in an appraisal report, when they are simply extracted from the market at that time. I would think real estate brokers and mortgage brokers feel the same way.

Current mortgage strategies give the (or point a) finger to conventional wisdom, the proverbial 20% down payment rule-of-thumb.