Does this have to happen? Is it inevitable that we run out of people who have large cash down payments? There is only so much cash but there are also only so many homes.

Nice summary at the end, it shows how fragile the market is.

Once all the cash is gone in downpayments, the retail sector will take another it I think.

Another statistic that shows what home “owners” did with their equity appreciation is that residential equity is now only about 45% of residential housing valuation, including, I might add, the 30+% of people who own outright.  A very large fraction of the home “owning” population is on the edge of being underwater, a segment that increases in size daily as values decline but mortgage debt remains.

Hey IR,

If you haven’t yet discovered the ACS Housing Data from the census bureau (that goes on every 2 years! not every 10), you might want to check it out and mine it for some future post gold.

It gives lots and lots of relevant details on cost of housing, when people bought, why, the upkeep state, the sq footage per person. Ask and you shall receive.

As prices keep dropping, the $ amount required for 20% down keeps dropping.  Even if no one was saving new money, more and more would meet the down payment test.

Here is a stunning calculation for you.  At the peak, the Los Angeles median home price was $550k.  A 20% downpayment was $110k.  That $110k is now 34% down (case shiller drop of 41% from peak).  If my calculations are right, at the bottom $110 will be more than half of the home price.  I estimate at the bottom $110 will be 50-67% down on a median priced LA home.

I used their data extensively when I wrote the book. I haven’t gone back and looked lately. Perhaps I should; you are right that the data is a goldmine.

“Does this have to happen? Is it inevitable that we run out of people who have large cash down payments? There is only so much cash but there are also only so many homes.”

If this were not the case, prices would not have fallen from their peaks in the last two bubbles. There are many more homes than there are people with large cash downpayments. Once the artificial constrictions on supply are removed, we will see just how many homes need to change hands over the next few years.

Perhaps that’s part of why I like the book so much. It’s been something like a year since I last read it, perhaps it’s time for a second read.

As different things appear in the market and the news media different questions occur, allowing you to extract new meaningful things from that data that it wouldn’t have occured to you to look at before.

It’s also great at settling online disputes over off-hand assumptions in the MSM.

Thanks, nice take on the myth of the move-up, one of those urban legends that the realtors always prattle on about.

As many people discovered, prop 13, combined with the high transactional costs of selling and buying a home combine to make your first purchase a home you may stay in for a long time.

We did the “cost of moving” calculation a number of times when we needed a larger home or wanted a more modern home. When we could afford a move-up with higher incomes and savings, we couldn’t ever make it pencil out.

Each time, the transaction costs and the new tax basis (including Mello-Roos and high HOA’s) on a different home made it far cheaper to add on and remodel. Since we liked our neighborhood, schools, and community, and weren’t driven by any need for conspicuous consumption, we just couldn’t figure out the logic of the move-up vs adding additional square footage and upgrading, well, upgrading pretty much everything a step at a time.

Of course, we live in the parallel universe of savers and investors, rather than spenders and borrowers, so our logic may seem somewhat perverse to the HELOC abusers and ARM mortgagees.  We’re much happier with the life detailed in The Millionaire Next Door, where we own our house and cars, save instead of borrow, and shop on Craigslist instead of at South Coast Plaza.

It looks like lots of people will be reluctantly beaming into our reality as their financial house of cards has collapsed.

“we just couldn’t figure out the logic of the move-up vs adding additional square footage and upgrading, well, upgrading pretty much everything a step at a time.”

This to me is the fundamental where everyone wins. You get a bigger and more modern house in a neighborhood that you like, the construction guys have plenty of these jobs to keep ‘em busy and most people stayed out of debt because they added a room when they could afford it. They rebuilt the kitchen when they could afford it. They remodeled the bathrooms when they could afford it. The last 8 years saw people using their house’s ATM to upgrade the house, not their savings. One big problem that I see with most of newer OC today is that you are not allowed to add on or perform major rebuilds on your home due to HOA restrictions. When you buy a small place today in most parts of Irvine, you’re stuck with that square footage for the most part.

Over time, those downpayments get smaller and smaller.  Imagine a couple saving $1000/month for 2-3 years having a 20% down payment.  Welcome to Riverside 2009.  Many LA county zip codes are already there.  Don’t be surprised to see single family homes in less desirable parts of OC in this price range in 2010.  Maybe a condo in Irvine in 2010 or 2011 will be $180k.

Currently 12 million home owners are “underwater”.

It’s looking more and more like we will see prices in the 1998-99 range on a per square foot basis within 12-18 months imho.

My sister made the same calculation about 5 years ago and added an upstairs to their home in San Jose because it was more cost effective than selling and buying a bigger house.

Irvine Renter: One potential problem in normally appreciating home markets is buying a condo with the intent of moving up to a sfr. Traditionally, condos appreciate more slowly than houses. I think that would make rental equivalence (and saving the difference) pertinent in the move up scenario only in moving up to like type housing.

As a postscript, when we thought of our house primarily as an asset, we were very conscious about the ROI of our addition. We knew that we could recover almost all of the cost of adding another master bedroom and accessible bathrooom in our neighborhood.

Now that we’ve decided to age in place in a house we own, my wife keeps insisting that any project is “pennies a day”.

On our last major project, I did the math and challenged her with an actuarial calculation. Without missing a beat, she responded that she would just have to live longer.

In a normally appreciating market (any market outside California), the rate of appreciation is similar across all asset classes. In absolute dollars, the condo appreciates less because it is from a lower base. All appreciation is ultimately tied to wage growth, so there can be no long term imbalances between different market strata.

The main issues with the condo savings play involve timing. You still have to sell the condo and get out without losing money. It takes 2 or 3 years of appreciation just to recover your transaction costs, so it isn’t like signing a 1 year lease on an apartment. Also, you need to use a fixed-rate mortgage so that your “rent” to the lender does not increase. The longer you stay in the condo, the more favorable it becomes because you also avoid rental increases.

“Even if she had tried to use it to move up, the properties she would have been bidding on would have appreciated by at least $85,000 so she was no better off in 2007 than she was in 2003.”

Of course, when there is $0 downpayment and a stated income or worse loan, all those calculations are irrelevant. Move up, and extract equity from a bigger pot!

The fact that lot sizes are so small in Irvine is a major factor in not being able to add on.

I believe that will happen for sure if interest rates (30 yr fixed) go up to a more normal 7.5 or 8%. I bought a townhome in 1999, and that was the interest rate back then. That townhome cost me $280k and is now selling around half a million (amazingly expensive if you ask me). I am expecting interest rates to go up to those levels, either because of the risk the banks are taking or because of the Fed printing money, or whatever.

Rising inventory of troubled homes could spur fresh wave of foreclosures

“Speculation abounds about why bankers have let so much distressed inventory build up without foreclosing. A major theory is government pressure to work harder with borrowers and to modify more loans.

But O’Toole believes that banks also kept foreclosure losses off their books while preparing for recent “stress tests,” and are still awaiting a federal plan to unload their “troubled assets.””

Move-up is mostly BS.

Move-up works when you have had a big promotion, or when you have lots of equity due to paying down your mortgage and you are willing to sign up for more years of debt servitude.

Move-up because you have appreciation equity (e.g. bubble equity) is bad timing because you would have had more equity if you had “moved up” right away before buying the first place, not after appreciation. Plus you are more likely to have done that in a bubble.

People think they’re smart and figure out this “buy, appreciate, move-up” scheme, but the fact is they haven’t figured out shit. They parrot what the marketres tell them.

Did anyone see what happened in the bond market today?  It wasn’t good.

I hope all the foolish “dip-buyers” shopping for real estate understand that their monthly mortgage cost increased significantly today.  If you didn’t lock that rate down, you better be prepared to look for cheaper real estate tomorrow.  Ouch!

My personal opinion is that it is partly capacity.  An individual bank can only handle so many foreclosures at once.  They had to staff up quickly.

During 2008 and early 2009, there were a long stream of new offers, laws, and incentives coming from the Federal govt.  Banks waited thinking the might get a better deal.  To some extent they are still doing that.

There is also some major selection occurring in what gets put on the market.  The banks tend to put the ones in the best condition where they can recover the most of their own money.

This is what I would expect for a 1.2 million dollar house.

... I hope all you foolish “peak low interest” buyers can stomach as your properties drop another 15% because no one can afford the new monthly payment to cover the place you hope to unload on others.

The market was in free fall until the government forced the bond market to historic lows. Now that the gig is up, the free fall will resume wiping out what could have been a small bit of price appreciation this summer.

Lee: The way 10 yr T-bills have been bouncing around, I wouldn’t count out another drop that will bring mortgage rates down again. On the other hand, if they don’t, not only will home prices have to drop even further to compensate, money market rates will likely move up as well. So all is not lost for the frugal among us.

Moving on Up?  Remind me of the Jeffersons’, but George Jefferson had enough sense to move on up because of their increased income and not trading up on house equility.

Well we’re movin on up,
To the east side.
To a deluxe apartment in the sky.
Movin on up
To the east side.
We finally got a piece of the pie.

Fish don’t fry in the kitchen;
Beans don’t burn on the grill.
Took a whole lotta tryin’
Just to get up that hill.
Now we’re up in the big leagues
Gettin’ our turn at bat.
As long as we live, it’s you and me baby
There ain’t nothin wrong with that.

Well we’re movin on up,
To the east side.
To a deluxe apartment in the sky.
Movin on up
To the east side.
We finally got a piece of the pie.

I’m not sure if your moveup logic is right. The mortgage gives you leverage, which changes the math.

You buy a $100K house for $10K down. It doubles to $200K.

You desire a $200K house which also doubles to $400K.

Your $400K desired home needs a $40K downpayment. Leverage has made your $10K downpayment a $110K downpayment.

Buying the cheap property, and having it appreciate, brings the expensive property into reach even if it appreciates by the same amount because your downpayment gets magnified through leverage.

<< You still have to sell the condo and get out without losing money. >>

This line focuses on another issue I think many current buyers will have to face later. Buyers in the current low interest rate environment are, as is typical, buying according to ‘affordable monthly payments.’ When rates inevitably rise, if these folks need to sell, and if incomes haven’t really risen, the pool of potential buyers with the same monthly payment metric will be putting more to interest and less to principal. In short, they will be bidding less on the house than currently.

So not only do I want to see prices lower when I buy, I also don’t want to do so when interest rates are at the floor. I’d rather buy in a higher-rate environment, and refinance to a lower rate later.

The problem I see with the leverage argument is that after the $110K down payment is made on a $400K home, there would now be $290K (not including interest) of debt you are on the hook for. That probably means the monthly payments are quite a bit higher than before.  So just because a $400K home is now more in reach from a down payment stand point doesn’t necessarily mean it is more affordable.

If the reason why you couldn’t afford the house you originally desired was due to down payment, then yes, the move up game can work.

If the reason why you couldn’t afford what you really wanted was payments, then the move up game works against you.

In your example, your downpayment on the move up would actually only be $98k due to sales commission. And your mortgage would be $302k.  If you had bough the $200k house up front, your mortgage would only have been $190k.

The limiting factor during the bubble wasn’t down payments, lenders weren’t requiring them.  It was affordability of payments (and that wasn’t really a limiting factor either).

I mention the sales commission because in more rational periods of appreciation, it is more significant.  Commission only ate up 12% of your appreciation in your example.  Suppose appreciation had only been 50%?  Sales commission would have eaten up 18% of your appreciation.  (50k - (150k*6%))=$9k commission.

CHUNK: Right, you are still on the hook for a $290K mortgage. Much more than your original $90K mortgage. But still, leverage helped you. People find it hard to save for big downpayments.

FLYOVERCOUNTRY: Yes, commission eats up some of your appreciation. But in recent history, we’ve had 300%+ appreciation, not 50%, and in the future I don’t think we’ll see 6%.