San Diego Housing Bubble News and Analysis

Do you mind if I ask where you heard this information? A client of mine just closed last week with 5% down. Another client just got approved with 10% down with Wamu.

SD Realtor

What kind of rate does 5% down get you? Out of curiousity, why did they only put 5% down? Were they planning on doing extensive repairs/upgrades or did they only have 5%?

SD R,

I heard it from wells Fargo.

Hi Ranjan -

If that is what they are doing then so be it. The exposure that they have had to the downside may be coming to haunt them and they must strap up hard to move their paper. (which is not a bad thing by the way)

However (and unfortunately) there are still many vehicles out there for low downpayments. The loosening (aka stimulus package) really stinks (at least for me as someone who has been a prudent buyer and do not believe that people should buy a home heavily financed) and allows some serious FHA financing packages that enable heavy financing with little down.

SD Realtor

I don't think this is a bad thing at all. It will help people have some cushion for a further drop in the market and not stretch to get into homes, which contributed to the current crises.

What I have set aside for a maximum contribution for a down payment dictates the max house I can buy. The minimum I am going to put down is 20% and the most likely down based on the prices of homes on my short list is between 25%-30% down.

Of course, I have this thing that I overpay into my mortgage principal for a few years until I have 70% equity.

If you know, is the 20% for owner occupied or for all purchases, such as second homes, etc? Thanks.

I hope Wells Fargo and the rest of the banks decide to do this. Not becuase itll mean that something like 50% of would be buyers can't buy now, killing the market, but because it would be the start of actually healing this market. We would have 12-24 Horrible months, a boat load of forclosures, a recession, and revert to the fundamentals that make a solid market. If banks dont do this, we'll have 60 horrible months, a boat load of forclosures, a revision to fundamentals, a recession and alot of wasted time (plus a bunch of Gov debt). Seems logical to me. But then again there is the whole solvency thing, so....

BTW, How much did the market fall in December? Any bank still lending at a 5% down payment in San Diego should be banned from borrowing from the FED. They are farting away money. 'Poof', and all that is left is the stench.

I'm having a case of brain constipation.......

The *pre-stimulus pkg* conforming limit of $417,000 means that you don't need mortgage insurance for a loan under that amount right?

I'm forgetting the ramifications of a dwn payment of less than 20%.....wasn't it related to the conforming limit? Or was it something else entirely?

Loan policy has been so ridiculous and permissive during the bubble that a return to fiscally sound loan policy will no doubt be perceived by many as draconian, "you mean you actually have to put 20% down?, how unreasonable!" lol

The $417k is the amount the gov. would guarantee the loan for. Anything above that is a jumbo loan.

Less than 20% down means you pay PMI.

why putting 10% down is such a bad thing?
The bank should be looking at documented income, assets and credit standing of the person they are issuing loan to.

They got over-powered by greed, over-looked the basics and paid the price. Why should they vent it out on the disciplined and fiscally responsible citizens?

One could manage to put down 20% but may be willing to put 10% only. He/She can have other 10% in a form that's easily usable for other purposes.

Does anyone have HLS's email id?Would appreciate.

Thanks

Thanks

Ranjan, requiring 10% down is only a very small protection for the (ultimate) lender in a non-recourse purchase loan state like CA facing major and persistent price declines. Credit scores, and wealth in other assets, mean even less. About all that protects the lenders in a market in major decline is the borrower's downpayment, and a 10% downpayment is less than the projected one-year decline in home prices in most CA markets. It's so small it's a joke.

Consider this situation: Someone buys a $1 million house now with 10% down, so the ultimate lenders put up $900,000. In 3 years time the house is sold for $600,000. How do the lenders get their $900,000 back? They don't of course, regardless of the credit or other assets of the borrower. No matter who the (non-recourse state) borrower is, the lenders get back just $600,000 less the sale expenses, and take a massive loss.

In my example, which isn't too outlandish, the lenders would have to have received annual interest of $100,000 in excess of the Treasury rate for 3 years in order to be compensated for their $300,000 loss at the future foreclosure, ignoring their foreclosure and other costs. That's 11.11% extra interest annually over and above the risk-free rate! Clearly, lenders still are not charging anything even close to the interest rates required to justify 10% downpayments. Before now, the lenders were all pricing in never-ending home price inflation. Now they are all pricing in huge government bailouts.

Patient renter in OC

Patientrenter you bring up very good points.

Ranjan there is nothing "wrong" with only putting 10% down. The point that is being made is that from a market perspective, lax lending standards and risk prone financing ultimately leads to inflation of the security which then leads to bubbles which produces an unhealthy market. While you may be a very responsible person the fact is that most people cannot control themselves. We are a nation of consumers who really know very little about living within our means. It is a behavior that is promoted by pretty much every entity in our society and not only encouraged but essentially rewarded by our government.

Now while pretty much everyone here frowns on people who are looking to buy now, it may be argued that we are approaching a point where low downpayments and low interest rates are going to disappear. When that will happen or if that will happen is up to speculation. It sounds like you are on the cusp of buying. If you look at past posts you should be able to dig up HLS's email. Also your Realtor should have many broker contacts who can find loan programs that will match your needs.

Good luck!

Wow, the house I could buy with only 5% or 10% down. But I don't think one should buy what a bank will "let" him or her buy. A credit card company will also "let" you run up a huge amount of debt and then watch your little teaser rate dissapper as they lock you into their "standard" high rates.

People should buy what the can buy comfortably, without worrying about appreciation and depreciation. In this market, I consider a 20% down as a break even down from an appreciation standpoint. 30% for me is ideal, which is why I am pushing my wife to buy a home at a price where we can put in 30% down from our downpayment fund. If you put 30% down, you won't worry about the market continuing to tumble so much, particularly if you are buying a long term home and don't look at your home as either an investment or a supply of home equity funds to fund your lifestyle.

That is why I am a buyer right now. We need a new house, plain and simple. I am keeping an eye on the market to get the best price. After I buy, well I will keep an eye on the market up here until I sell my current house, or keep it and rent it out. After that, perhaps curiousity will keep my interest, perhaps not.

We could go for 5% or 10% down and buy almost twice as much house. But the payments go up too, and even though we could "technically" afford that as far as the bank is concerned, and even though it is a long term purchase, you never know what life brings and planning for a rainy day is not a bad thing. It gets you peace of mind. There are folks I expect, who bought at the peak, and are not stressing because they put so much down, they still have positive equity.

My current home has lost 10% value in two years, but I bought 8 yrs ago with a big down. So while I wish it were worth more so I could get more $$ out of it, I am not stressed about it.

The great thing about living below your means, is that you don't stress about money, can help those you care about when they are in financial distress, can give away a larger part of your income to charity, which adds greatly to ones happiness and sense of community, and are prepared for that rainy day or unpleasent surprise. Financial stress is a life shortning thing and interferes its enjoyment. I have been there, I remember. It was self inflicted and I realized I am not a masochist, so I stopped.

These are some of the affiliates of Wells Fargo and as you can see all loans require 20% down.

http://www.linearfinancial.com/loans/def...

http://www.pardeehomeloans.com/dailyrate...

those links appear to be just examples for payment calculations. i am a past wf customer and seem to remember that this is the default used for budgeting. the actual wf site allows you to play with the down payment % for payment calc purposes.

It seems like the discussion of whether 20% down payment should be mandatory comes up a lot.

I used to be adamantly opposed to requiring 20% down for borrowers with good credit. Mainly because it would take a lot of years to save up 20% of the median home price in SD. That basically means you have to come up with at least $100k, which seems impossible for a first time home-buyer to save up. Instead of young couples looking to buy their first starter home, we would have middle-aged folks entering the market for the first time b/c that's how long it would take to save that kind of $$$.

After seeing the bank I work for get hammered by 80/20 loan products, I am starting to come around. The banks are just taking on too much risk with no committment from the borrower. It is just too easy for people to walk away. Even piggington folks like 23109VC seriously consider walking away (see his post: "Harveston down the drain").

It really frustrates me that I have a professional degree w/ decent pay & still can't come close to buying a house in my own hometown. In the late 70's, my father-in-law bought a brand new home in a shiney new Mira Mesa for $30k. He was a 2nd year enlisted man in the coast guard, and could buy a home here! The price was 3x his annual salary.

My Dad bought our Poway home in '86 for $85k & he was a machinist for Ryan Aero making about $40k w/OT at the time. The house was barely more than 2x his annual salary.

I made over $80k when I lived in SD last year, and the middle of the road home in my hood was about $750k. Almost 10x my yearly wage! That just pisses me off.

I like to think tightening lending standards (like 20% down), although making things really ugly in the short-term, would bring the affordability of San Diego back to reality some day.

Just trying to get back to the original posters message. I spoke to a mortgage broker today who said she has a 100% financed loan for her buyers through Wells Fargo. I told her that I heard from someone that Wells was doing only 20% down loans and she said that is not true for conforming loans. She said that for conforming loans Wells still does have a 100% financing option.

Now that the conforming loan limits are going up, that may indeed help people like Ranjan.

Ranjan please comment if you can. Was your post for a loan above the conforming limit?

********

Please do not confuse this post of mine with being bullish or telling people to buy now... yada yada yada...

As always I am just trying to post facts that I dig up. (Except when I say "this is a speculative comment or an opinion")

SD Realtor

ps - Yes I would much rather have tighter lending standards as well guys.

I made over $80k when I lived in SD last year, and the middle of the road home in my hood was about $750k. Almost 10x my yearly wage! That just pisses me off.

This is happening because people can buy with less than 20% down. What happened is that, through deregulation of the banking industry and securitization of home loans, the barrier to market entry was lowered significantly, drastically increasing the number of participants. Supply held relatively constant, prices have nowhere to go but up. 20% down should be the rule of the land but it's probably never coming back. Instead we will get this weird socialized debt system, where those willing to go most into debt are subsidized by those who save and live within their means. Like the economy of the old Soviet Union, it is an ideologically-based system -- those with the most faith in the glory of the "free" market will borrow the most and overextend themselves because they're sure everything will work out in the end. When it doesn't, those of us who are ideologically unfaithful (i.e., save our money and live within our means) get punished with higher taxes for bailouts and deflation of our money through currency debasement . In the end of course, the market is completely rigged and anything but "free", but those faithful to the prevailing ideology (borrow and spend as much as possible) are rewarded with big fancy custom homes and new BMWs while the rest of us live in apartments and drive 10-year-old Hondas.

Depressing, isn't it?

Yes very depressing.

CONCHO,

The Soviet Union also went bankrupt and collapsed.

The credit crunch/deflation is already happening and nothing can stop it. I can't borrow a 800k with no money down if no one will lend it. I can't even service the debt I have if I lose my job. Thats where we are now and its only getting worse in the future.

House prices are going down, unemployment is going up and those of us that are prepared will ultimately be rewarded.

The sort of backwards-think displayed in your post is exactly what got us in this mess I might add.

The Soviet Union also went bankrupt and collapsed.

Not before the supermarket shelves were empty and people were growing vegetables on their balconies to stay alive. If we're going down that road (which I'm afraid we are), this thing is just getting started. The endgame of an ideologically-driven economic collapse is very, very ugly. You have starvation, freezing to death, things like that. Things are still quite nice here. We could go downhill on this path for another 50 years.

The sort of backwards-think displayed in your post is exactly what got us in this mess I might add.

Hey, I don't like it either! I said in my post we should require 20% down! I am after all one of the ideologically unfaithful, renting a place, driving an old car, paying off my credit cards every month and saving my spare American pesos in the bank. I'm just calling it like I see it. I realize that people like me are not the norm and in fact are hated and despised by the society at large. Remember that outside of the public sector, our society manufactures very little. Most people with middle-class jobs outside of the government or defense contracting are involved in the shuffling of money from one place to another, the charging of fees, etc... People like me don't put any sheckles in their pockets so they will try to minimize our influence. They want everyone borrowing, paying late fees, paying refinancing fees from here to eternity. That's how they pay their mortgages. It's a grand con and I am not participating. Unfortunately people like me are in the minority and our numbers are destined to diminish year by year until the inevitable collapse finally comes.

On the subject of down payments...I was reading Ben's blog this morning and he quoted from an article about a Bay Area woman who saved up 20 percent for a down payment so she could buy a home in the $1 million range. Lender after lender has been telling her, "Nope. We want 45% down." Wow!

raptorduck

I am a little confused as to why somone with a good deal of wealth would put any more than the minimum amount down on a home that would qualify him for the best possible rate. WWith substantial amount of wealth I would have to assume that you have a Good financial advisor. What have they suggested about doing this? Just doesn't seem to make a lot of sense to me.

Lender after lender has been telling her, "Nope. We want 45% down."

Awesome, that says that they expect that it is at least possible that the property will decline $450K in value. Sounds like they may be planning on carrying this mortgage instead of securitizing it. If we can avoid the government bailouts and put an end to the securitization so that banks have to carry these loans we will see normal prices return. Otherwise it's just gonna keep on going -- until it can't any more...

i dont understand how securitization of loans was a socialist experiment. the sale of debts seems to me to be the epitome of capitalism. that unregulated capitalism is the reason we are here today and not vice versa.

i dont understand how securitization of loans was a socialist experiment.

It wasn't. Like you said, securitization of mortgage debt and the fraudulent rating thereof was unregulated capitalism. The socialism will come in the endgame, when unregulated capitalism produces the predictable disastrous outcome -- in this case a massive wave of foreclosures. The government will either print money to deflate the value of these debts as well as their own (stealing the savings from those who have it, a "stealth" tax as it were), or by simply purchasing the bad loans and then renegotiating the terms with the borrowers to allow them to stay in their houses. There are tons of plans floating around now, but all of them will involve a transfer of wealth from those who have it to those who don't.

A similar thing happened under FDR in the 1930s after another disastrous episode of unregulated capitalism run amok. The answer then was massive public works projects, social security, etc...

Long story short, if you don't like socialism then make sure your capitalist system is well-regulated. Otherwise, that's exactly what you're going to end up with when the wheels come off the ponzi scheme and the unwashed masses demand reparations. In the 1920s it was stocks, this time it was houses.

ok, i see. you said that we *will* get "a weird socialized system" and not that that's what we had.

frankly, the term "socialism" has become so distorted and stigmatized that it's meaningless and should just be avoided. whether or not anyone wants to admit it, america is a socialist country.

Raybyrnes,

Jumbo rates are not that great. Mortgage interest is not deductible over $1,000,000. Why wouldn't you put a good chunk down on a pricey property? Just curious.

Jumbo rates might not be great for someone with average credit but with good credit rates are still in the high 5 low 6 range.

Morgage Interest is not deductible over 1 Million. Would need to simply run a weighted average calculation to adjust for cost of capital relative to potential rates of return. May find that this is a reason to put down or not put down additional capital.

I would not personally elect to put more down than absolutely necessary because as long as I possess the capital or ahve acces to it I have security knowing that in a worst case scenario I ahve bought myself additional time to make payments whereas if I plunk money down than the bank has my capital and I ahve to trust in my ability to get Equity lines and other products if I need to unlock the equity.

Sort of like this. Hurrican Katrina hits. Would I rather have a low monthly payment and little capital in the bank or would I rather have a higher monthly payment but lots of money in the bank. I would rather opt for scenario 2 provided I was not getting hit with some absurd premium. IE a 9% loan as opposed to 6%. That is my reasoning. Is there some flaw that you would point out to me.