For those with real estate investing experience, I am wondering if, in practice, there is a dead zone of appreciation starting around $700,000, where properties around there have a hard time going up, compared with below $700,000 and above around $770,000
To take a $700,000 house, someone with a $140,000/20% down payment will qualify for an extended conventional loan pricing, right now around 3.75%.
But to increase the purchase price by a mere 5%, to $735,000, suddenly the buyer faces the choice of (1) paying the entire extra $35,000 in down payment (a 25% increase in down payment over a 5% increase in house price) and (2) increasing downpayment by only 5%, for a total of $147,000, but getting a jumbo loan that costs, not an extra 5%, but more like an extra 10-11%.
So below $700,000, going up a $1000 in price means your buyer pool shrinks just a little since only an extra $200 is needed up front. But above that, to avoid the conventional cutoff, you need to pay the entire extra $1000 in down payment.
Once you get to around $770,000 or so, your pool of buyers have already accepted that they either are going to pay a high jumbo rate or put up a big down payment.
But in the “deadzone” right above $700,000, a buyer has a choice of just going a little cheaper and getting a much better mortgage, so trying to sell at $735 means it is very hard to compete with those selling at $700. To get that extra 5% in price, you have to make your house 10% better.
Of course this isn’t the only theoretical dead zone, smaller ones happen around $521,000 when you have to go from conventional to extended conventional with a 20% down payment, and another would be around $624,000, which is the extended conventional max with a 10% down-payment and mortgage insurance. Neither of these, however, involve such a big increase in mortgage cost for such a small increase in mortgage size.
If someone wanted to test my theory, you’d make a chart of sales translations and price. My prediction is that instead of a smooth slope downward as prices increase, there would be a cluster of extra sales around $700,000, then a sudden drop in transaction count around $720,000.
It doesn’t have to do with down payment, it has to do with how much loan can they carry with their income. Get more ‘liberal’ with how loans are qualified, and the prices go up — and another bubble.
With rates very low, I’d guess a lot more people buying the in 700-750k range are limited by the need to come up with a $140,000-$190,000 downpayment, than people without the income to qualify for the mortgage.
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