“We need to look hard at some of the old assumptions and ask the question is homeownership the right solution for everyone?” Moynihan said today during a speech at the Brookings Institution in Washington.
Of course it's not.
Lenders need to carefully underwrite loans and ensure that borrowers have an incentive to maintain their payments. Still, he said, “I don’t think there is anything magic about a 20 percent down payment; 10 percent seems reasonable.”
Considering that you have 6% that disappears every time you transact (in the form of Realty commissions, plus a bit more for fees, costs, tax stamps, title policies and similar) 10% is dangerously close to zero in real terms.
The 20% down payment is not just about protecting the lender from the risk of value decline, although that's certainly a part of it. A 20% down payment makes it relatively easy to argue that the entirety of the created credit money is offset by locked-up asset value in the form of the capital represented by the house. In addition it limits leverage in home ownership to 5:1 and it is the limitation of leverage that holds down price ramps, making housing more affordable for everyone!
After all if you don't own a house you want prices to be low, not high!
The 20% down payment also shows that you can save back a significant amount of money. This sounds like "no big deal" but in fact it is a very big deal. Houses come with significant expenses and they're ongoing expenses. A house needs a new roof, furnace, water heater, A/C unit and carpeting from time to time. Your kid might break a window that needs to be replaced. Not only are there calamities (which you can insure against in whole or part) but there are ordinary costs of upkeep and maintenance that must be performed and if you're going to own a house you need to be able to budget and sock back the funds to handle those expenses as they arise.
Some people will argue that you can just borrow more and more money as necessary to fund those things, but what happens if your roof needs replaced while you're unemployed and thus don't qualify for a loan? Or if your furnace craps out in the middle of February, your credit cards are maxed, and you need a new one right now or you'll freeze?
The proved ability to accumulate a significant amount of capital is utterly essential to sustainable, and thus successful, home ownership. A 20% down payment made with your own funds that you can trace the provenance and accumulation of demonstrates your ability to accomplish this essential task.
Finally, home ownership makes labor far less mobile, and for some people this is just a bad deal all around, especially during difficult economic times. If you "own" a house but will lose 6% of the value in fees and costs selling it that grossly inhibits your ability to move where the jobs are. During good times this is not a big problem as you are likely to be able to find a better job (or any job!) where you live, but in tough times mobility is an asset.
Government, for its part, needs to get the hell out of the system. All it has done is distort and damage the public at-large, and it will continue to do so, because all attempts to "expand" home ownership involve destroying or ignoring one or more of these important metrics.
Better late than never Brian.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.