I’ve noticed that several of the recent buyers in Irvine are putting 30% - 50% down as down payment, with some 100% cash buyers, and I am wondering if this would be the best option when purchasing a home in the next couple of years. Hypothetically, Assuming that a buyer (Joe) is looking to buy a home in Irvine that is valued at $800,000. Let’s suppose that Joe has $800,000 sitting in his savings account and interest rates are 9% in 2010. In this situation what would be the best option for Joe to put down.

A) $160,000 20% as down payment and get a mortgage for $640,000
B) $383,000 50% as down payment and get a mortgage for $417,000
C) Put the entire $800,000 100% down

Are we going to see a trend where 30 - 50% down is going to be a norm for Irvine Home Buyers in the next 5 years?

PANDA - 17 November 2008 11:25 PM

I’ve noticed that several of the recent buyers in Irvine are putting 30% - 50% down as down payment, with some 100% cash buyers, and I am wondering if this would be the best option when purchasing a home in the next couple of years. Hypothetically, Assuming that a buyer (Joe) is looking to buy a home in Irvine that is valued at $800,000. Let’s suppose that Joe has $800,000 sitting in his savings account and interest rates are 9% in 2010. In this situation what would be the best option for Joe to put down.

A) $160,000 20% as down payment and get a mortgage for $640,000
B) $383,000 50% as down payment and get a mortgage for $417,000
C) Put the entire $800,000 100% down

Are we going to see a trend where 30 - 50% down is going to be a norm for Irvine Home Buyers in the next 5 years?

Put 20% down and use the rest of the money to buy Gold. 

Buying durable goods like gold is popular because we are basically faced with the collapse of our monetary and banking system and gold is useful for barter transaction. (scary)  The only reason people would be making such high down payments is either they believe the trend will be inflation, the dollar is worthless, the lender so requires, or they are stupid. Think about this: just a week ago a 4 week treasury note from auction yielded a mere .07%.  You read that correct, .07%. And the 9% is wishful thinking.  If deflation hits hard and you have a mortgage you are required to make the payments as required by the contract even though it will require much more labor to make a dollar due to deflation and a cessation to easy money inflationary policies. The bailout and all the other bills merely push out the inevitable.

Keep in mind that even if asset values fall like a rock, lenders will merely increase the interest rate regardless of the fed funds rate… as we saw in October, the TED spread. (that is assuming there is money to lend). Hence better to make as a high a payment now than to risk high rates or no loan at all to get the home they want.

The number of people capable of making such large downpayments is extremely limited. Residential real estate markets thrive on leverage. The bubble was not inflated with cash buyers. When these knife catchers with cash have exhausted themselves, we will be back to leveraged buyers. With the limited availability of loans and with the terms that keep decreasing the loan amounts, prices will not remain supported at these levels.

Oh, 9% mortgage? or 9% Savings?  That brings up a good question, what do you think saving rates will be in 2010.  From an investment standpoint, ff we assume, that since he has all cash, he might get a better return in his savings.  Since housing will probably still be flat.  I bet, he might put in at least 50% down, if interest rates on his mortgage hit 9%.  Again assuming that this will be his primary residence and wants to build equity, versus a rental property.  In that case as much cash down to cash flow would be adequate.

IrvineRenter - 18 November 2008 08:53 AM

The number of people capable of making such large downpayments is extremely limited.

I recently sold a house to a buyer who made a 50% down payment.  During the brief time it was listed, several buyer agents told me they had buyers who could pay substantial down payments.  I learned through personal experience lately that 20% down is insufficient if you also own other properties so I think that could be one reason driving the large down payments.  While I think the number of homebuyers capable of making a large down payment is not large, I don’t think it is extremely limited.  Pretty much anyone who bought before 2001 and did not HELOC their home is capable of making a substantial down payment, espeically if they have already sold.  I’m sure the IHB renters who sold in the last couple of years are sitting on mountains of cash.

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

roundcorners - 18 November 2008 10:14 AM

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

I accepted a lower offer with a 50% down over two higher offers with 20% down even though they had prequalification letters.  I didn’t not want to take the risk of the buyer not being able to get funding.  P.S., in the current credit environment, a prequal letter is totally worthless.

roundcorners - 18 November 2008 10:14 AM

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

It definitely matters in today’s market.
The seller wants to be sure the deal will go thru and not fall out due to financing.
A buyer with a strong cash position should be able to negotiate a better price.
Haven’t really seen that yet.
A lot depends on the seller if they’re motivated or not.

High Gravity - 18 November 2008 10:19 AM

roundcorners - 18 November 2008 10:14 AM

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

I accepted a lower offer with a 50% down over two higher offers with 20% down even though they had prequalification letters.  I didn’t not want to take the risk of the buyer not being able to get funding.  P.S., in the current credit environment, a prequal letter is totally worthless.

High Gravity’s post came in just before mine.
I agree with his comments and believe that most sellers in the marketplace feel the same way.
The biggest hurdle is the % off the seller’s list price.

roundcorners - 18 November 2008 10:14 AM

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

Even though my buyer only put 20% down, she submitted a copy of her savings and brokerage accounts which showed that she had about 50% of the cash needed to buy my place.  That right there put me at great ease…it’s not about how much money down the buyer puts, but rather how much cash they have on hand (which means they can pony up more cash to close the deal if need be).

roundcorners - 18 November 2008 10:14 AM

Does having a larger down payment give you a better chance at purchasing the home?  Does the selling agent get to see the amount down?  I always assume that, they only get to see an offer price, and as long as they clear escrow it’s all good.  I would assume that the seller will still pick highest offer, regardless of the amount down.

I don’t think this was directly answered but… yes, the seller does see what the financing terms are. In most cases, this is as important as the offer because it gives the sellers an idea of how solid the buyer is and how easy escrow will be.

On the buying side, having a higher down I assume, along with credit and income would qualify you to offer more; therefore increasing your chance of clearing escrow?

With today’s credit crunch… you can actually beat out a higher offer if you have a better finance package. I would surely take a 50% cash offer that was $10k less over a 20% down offer with a prequal letter.

And I agree with AO… there are more “cash” buyers out there… esp in Irvine… than logic would dictate.

While I agree with alot of people here, I have been turned down with some offers because they went after the higher (more $$) offer.  Even when I walked in with a large amount of cash.

As to the original question… I would put down between 30-50%.  This way the house can be made into a profitable rental as well as you being able to afford it outright if it is vacant.  But that’s just me.

My plan is to purchase the house and put the other half of the money (in CD’s and such) to pay for all the other expenses. 
As it is I have a CD that is a VERY long term and pays monthly interest.  That interest can afford a decent home alone, so if I can get the home at less than 6.5% then i’ll keep the cash where it is and just pay the loan as I go.

Anyways good luck
-bix

It also depends on how much higher the other offers are, how fast the sellers want to sell and whether the sellers realize how much more difficult “conventional” loans are nowadays.

If someone offers me $25k more with a solid 20% finance package, I would probably take that over a 50% cash buyer. If it’s only $5k more… I would go with the catcher… err… cash strong buyer.

High Gravity - 18 November 2008 09:39 AM

IrvineRenter - 18 November 2008 08:53 AM

The number of people capable of making such large downpayments is extremely limited.

I recently sold a house to a buyer who made a 50% down payment.  During the brief time it was listed, several buyer agents told me they had buyers who could pay substantial down payments.  I learned through personal experience lately that 20% down is insufficient if you also own other properties so I think that could be one reason driving the large down payments.  While I think the number of homebuyers capable of making a large down payment is not large, I don’t think it is extremely limited.  Pretty much anyone who bought before 2001 and did not HELOC their home is capable of making a substantial down payment, espeically if they have already sold.  I’m sure the IHB renters who sold in the last couple of years are sitting on mountains of cash.

When you consider the number of transactions it takes to support a market, and the number of people who have this kind of cash position, something has got to give. Plus, I am not seeing many organic transactions where people are selling a home with equity. Even the ones with equity have less than they should because they added to their mortgage. I see very, very few where there was not mortgage equity withdrawal. Further, I don’t know of many people who sold during the rally and then chose to rent rather than buy another home. We have some here on the boards, but this is not a large number, certainly not big enough to support a large real estate market for years to come.

I agree with IRs assessment, but Irvine does seem to attract cash heavy buyers (oh no…. here’s that Asian theory again!).

Just looking at IR2’s spreadsheet, the average down for 2008 up to September was 37%. I don’t know if that qualifies as a large downpayment but there were quite a few that were 100% cash buyers.

I really think the foreign investor/buyer (who may have little bubble knowledge) is a factor to think about here.

irvine_home_owner - 18 November 2008 04:39 PM

I agree with IRs assessment, but Irvine does seem to attract cash heavy buyers (oh no…. here’s that Asian theory again!).

Just looking at IR2’s spreadsheet, the average down for 2008 up to September was 37%. I don’t know if that qualifies as a large downpayment but there were quite a few that were 100% cash buyers.

I really think the foreign investor/buyer (who may have little bubble knowledge) is a factor to think about here.

Look, up in the sky, I think I see Asian all cash homebuyers heading towards Irvine!

Watch out Irvine, we coming to take over your land. We’ve got whole lotta cash. 100% Down ... NO PROBLEM!

The Shanghai Mafia - COMING SOON TO IRVINE NEAR YOU. By 2018, 75% of all of Irvine will be Chinese. Be scared.. Be Very Scared.

OMG! This picture is just SO Wrong. Are those 2 karat diamond teeth?

pssh most of those guys are spending family money….

18 months ago I sold my house in the high $800K area and took a 20 day all cash offer and put a 20% down offer at 20K more in backup position.

I had all contingencies removed in 5 days and $10K released to me from escrow so if they bailed out at least I had 10K.

Today I would leave $50K on the table not to have to deal with apprasials and banks on a 20% down $800K plus deal.

Pigs get fat-Hogs get butchered.

Enjoy

If one can qualify for the DTI limits, why not go max conforming FHA with 3.5% down, levered, and keep the cash for other investment opportunities? Won’t the buyer pool be so thin in a year or two that sellers will salivate for any hint of an offer from a fully qualified buyer?

Boston2theBay - 18 November 2008 07:41 PM

If one can qualify for the DTI limits, why not go max conforming FHA with 3.5% down, levered, and keep the cash for other investment opportunities? Won’t the buyer pool be so thin in a year or two that sellers will salivate for any hint of an offer from a fully qualified buyer?

You may want to ask this of a few hundred thousand folks who are losing their homes right now.  Their “investment opportunities” may not have worked out exactly as they has planned.

Boston2theBay - 18 November 2008 07:41 PM

If one can qualify for the DTI limits, why not go max conforming FHA with 3.5% down, levered, and keep the cash for other investment opportunities? Won’t the buyer pool be so thin in a year or two that sellers will salivate for any hint of an offer from a fully qualified buyer?

There are two reasons, other than the obvious one awgee referenced above. First, you will be paying insurance on the FHA loan which means you will be putting less toward a payment and thereby, you will have a smaller house. Second, paying off a mortgage is probably the best return on your money you can get right now. How many other zero-risk investments can you make returning 6.5%? A penny saved is a penny earned.

irvine_home_owner - 18 November 2008 04:39 PM

I agree with IRs assessment, but Irvine does seem to attract cash heavy buyers (oh no…. here’s that Asian theory again!).

Just looking at IR2’s spreadsheet, the average down for 2008 up to September was 37%. I don’t know if that qualifies as a large downpayment but there were quite a few that were 100% cash buyers.

I really think the foreign investor/buyer (who may have little bubble knowledge) is a factor to think about here.

I’m looking at a spreadsheet I have of the buyers in 92602 from 6/06-6/07 and I see plenty of Asian names, with a high average down payment/cash buyers. So then could you please explain to me how if sales in 92602 are half of what they were during that time, that these mythical Asian cash rich buyers could possibly effect the sales in Irvine? Seriously, I really would like to know. Because my econ 101 knowledge I have would make me believe that less sales mean less sales period. The percentage of Asian buyers has not changed, the percentage of high down payments/cash buyers hasn’t changed, but sales are still lower.

I know this is going to come off as cranky. But, one minute I feel like the Kool-Aid detox process is working for you, then I see this common sense and numerously debunked myth, and I wonder if you are sneaking off to the bathroom to snort a few lines of the Kool-Aid.

For the last time, Irvine will always have a high percentage of Asian buyers, Irvine will always have a high percentage of large down payments/cash buyers, but when sales are below historical levels, that means there are less buyers period. Whether they are Asians with cash or not, there are just less of them as there are crackercakes like me.

If the high down payment Asians stop buying homes in Irvine, then so will Caucasians. The best thing about this will mean that people will want to buy in Santa Ana because the Hispanics will always want to buy there and the prices there will be higher and going up compared to Irvine. See just how dumb this theory sounds when I put it like that?

graphrix - 19 November 2008 01:17 AM

irvine_home_owner - 18 November 2008 04:39 PM

I agree with IRs assessment, but Irvine does seem to attract cash heavy buyers (oh no…. here’s that Asian theory again!).

Just looking at IR2’s spreadsheet, the average down for 2008 up to September was 37%. I don’t know if that qualifies as a large downpayment but there were quite a few that were 100% cash buyers.

I really think the foreign investor/buyer (who may have little bubble knowledge) is a factor to think about here.

I’m looking at a spreadsheet I have of the buyers in 92602 from 6/06-6/07 and I see plenty of Asian names, with a high average down payment/cash buyers. So then could you please explain to me how if sales in 92602 are half of what they were during that time, that these mythical Asian cash rich buyers could possibly effect the sales in Irvine? Seriously, I really would like to know. Because my econ 101 knowledge I have would make me believe that less sales mean less sales period. The percentage of Asian buyers has not changed, the percentage of high down payments/cash buyers hasn’t changed, but sales are still lower.

I know this is going to come off as cranky. But, one minute I feel like the Kool-Aid detox process is working for you, then I see this common sense and numerously debunked myth, and I wonder if you are sneaking off to the bathroom to snort a few lines of the Kool-Aid.

No no… crank away… I really feel this needs to be discussed more because I wasn’t around for the foreign buyer debunking you speak of.

I’ve never stated that the number of Asian buyers in Irvine has increased from ‘06 to now… what I have said is that the number of Asian (nee foreign because I’ve seen quite a bit of activity from India and the Middle East) buyers in Irvine is higher than other cities so these high down buyers are more prevalent than somewhere like Santa Ana.

And unlike most of you here who still feel the bottom is far away… they probably think the bargains are in Irvine NOW (like most of the population everywhere). 20-30% price drops may be enough for them to jump in because they don’t think it’s going to go down any further. IPO’s data for the last few months has shown a flatter drop than the previous months which can lead them to believe Irvine is bottoming out.

Do I personally believe that? No. If I did… I wouldn’t be trying to sell my home (more on that when it happens).

For the last time, Irvine will always have a high percentage of Asian buyers, Irvine will always have a high percentage of large down payments/cash buyers, but when sales are below historical levels, that means there are less buyers period. Whether they are Asians with cash or not, there are just less of them as there are crackercakes like me.

If the high down payment Asians stop buying homes in Irvine, then so will Caucasians. The best thing about this will mean that people will want to buy in Santa Ana because the Hispanics will always want to buy there and the prices there will be higher and going up compared to Irvine. See just how dumb this theory sounds when I put it like that?

That’s the thing… Asians won’t stop buying homes in Irvine. Your theory is not comparable unless you know of a demographic that buys in Santa Ana that possesess cash reserves like the demographic in Irvine.

Let’s go straight numbers:

Let’s say the demographic of Irvine has 75% foreign cash-heavy buyers… and that hasn’t changed in the last 5 years.

Let’s say the demographic of Santa Ana has 10% foreign cash-heavy buyers… and that hasn’t changed in the last 5 years.

So going forward… which city is going to drop more slowly in pricing?

I know that IR’s (and everyone else’s) analysis is based on fundamentals but you still have to take the emotional/psychological/cultural factors into account. Aren’t those the factors that helped cause the bubble in the first place? If Kool-Aid is what got is here… don’t you think that Kool-Aid will still affect things… especially in areas where Kool-Aid distribution was very prevalent?

To add to that… I think the loans that were made on $500k Santa Ana homes are probably way more riskier than those on $1mil Irvine homes. When I look at those foreclosure maps in the OC Register… the pretty colors seem to indicate that. So the prices will drop… just not as fast due to these “unfundamental” factors.

And although we all like the funny pictures of the Asian ballers… I don’t think I’m the only one who thinks this has some merit.

The propensity of foreigners to become bagholders is pretty well documented:

The Dumb Money

Every time this issue comes up in a thread, I post the link above.