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Irvine Housing Blog

Irvine Housing Blog

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How are tomorrow’s buyers going to come up with a 20% down payment?

Posted: 27 Jul 2011 03:30 AM PDT

With down payment requirements going up, many Americans do not have the required savings to make a down payment on a house. Where will this money come from?

Irvine Home Address ... 35 WONDERLAND Irvine, CA 92620
Resale Home Price ......  $559,800

I'm comin' up for air so I can
Check myself again and I stand
Proven to the man but sheltered
Confidence we tend to (shove in)
Unexpected hunger traps me

Tantric -- Down and Out

When the housing market finally bottoms, many will look at the pieces of their shattered lives and wonder how they will ever own a home again. Gone are the days of easy financing and zero money down mortgages.

Lenders are now requiring 20% down. First mortgages with lower down payments are still available, but between the higher interest rate and the private mortgage insurance, the costs of these nonconforming products is prohibitively high. To make matters worse, lenders who lost billions on second mortgages are unwilling to extend bridge financing for those who need it to buy a home.

Many people still hunger for home ownership, particularly those who still mistakenly see it as a path to riches or unlimited HELOC spending money. However, desire is not demand, and despite the longing for home ownership, those who do not have the necessary savings or a sufficient credit score do not contribute to demand. Many will abandon their dreams of home ownership, but many more will carry on.

Down Payment on Home Out of Reach for Half of U.S., Poll Finds

Jun. 3 2010 - 1:13 pm -- Posted by Gail Cunningham

Buying a home usually represents the largest investment most people will ever make.  According to the National Foundation for Credit Counseling’s (NFCC) May online survey, that investment could now be out of reach for many.

The NFCC recently asked consumers about their ability to meet the down-payment requirements associated with buying a home in today’s market. Of the more than 2,000 respondents, almost half (49 percent) admitted that they’d never be able to save enough money for a down-payment on a home.  This is discouraging news for the housing market in general, lenders, potential buyers, as well as existing homeowners.

How many of you would be able to save the $120,000 down payment on a $600,000 Irvine home? Most American's don't save much, and with the pressures to look prosperous here in Orange County, the ability to save such prodigious sums is largely out of reach. Anyone living paycheck-to-paycheck has the odds stacked against them.

Owning a home has traditionally been considered a significant part of a person’s wealth-building strategy.  With almost half of the poll respondents indicating that they would never be able to save enough money for a down-payment on a home, the implication is that they feel that buying a house is, and may always be, out of reach for them.

Historically, finding the money for a down-payment was only a problem for first-time home-buyers.  After buying the first home, between the equity growing due to making monthly house payments and the value of the house appreciating, buyers could satisfy the down-payment requirement on the new home from the proceeds of the sale of the former house.  This is often no longer the case.

Realistically, unless our system changes, FHA loans are the only way first-time homebuyers and former homeowners with insufficient equity will be buying homes. First-time homebuyers have traditionally used the FHA or subprime, but now with so many former owners who lost everything in the aftermath of the housing bubble, many more people will find themselves in need of down payment assistance.

Due to today’s turbulent housing market, the problem has now spread to those who currently own a home.  Many mortgages are underwater.  Thus, even if the homeowner is able to sell their current house, there may be no profit available to satisfy the down-payment on the next home.  Exacerbating the problem is that as home prices have decreased, many lenders have increased the down-payment amount required to obtain a mortgage loan.

Equity has evaporated at a time when equity is most needed to buy a home. Some of it due to falling prices, and some of it do to irresponsible HELOC borrowing and dependancy. As is always the case at the bottom of a recession, cash is king.

With the average home price in America just below $200,000, a 20 percent down-payment is near $40,000, a nice chunk of change by any standard.  Some may still be able to obtain an FHA loan with a low down-payment requirement, but those with poor credit will likely have to put a larger amount down. Even with the economy improving, considering the staggering number of people who are out of work and those whose retirement plans have been decimated, buying a home may no longer be a part of the American dream, at least not in the near future.

Many people who didn't lose their net worth in the housing bust may have had to spend their savings to survive the recession making the buyer pool with 20% down that much more depleted.

Others responding to the survey indicated that their mortgage loan would either have to require a much lower down-payment (20 percent), or they would have to borrow the down-payment regardless of how much it was (18 percent).  Further bad news for anyone associated with housing is that the lowest number of respondents indicated that they’d have no trouble coming up with a 20 percent down-payment (12 percent).

Very few people have the 20% down. Only 12% of those polled said they could comfortably come up with the money. This is a serious problem for housing demand going forward.

Where will the down payment money come from?

Realistically, there are only two sources: savings and borrowing. Some may receive gifts, but those who don't have wealthy family members to give them money, they will either need to save it or borrow it.

Even in a booming economy, it takes years to save the necessary 20% down payment on a house. Most people are either unable or unwilling to endure the austerity such a sacrifice requires. Many will save their money and follow this path to home ownership. Kudos to those who succeed.

Most people will only save the minimum necessary and instead borrow the money. Those that follow this path will get less home than those who save because the borrowers will face much higher costs than the savers. For instance, the current FHA insurance premium is over 1% of the sales price. Its like paying double taxes. This extra expense comes out of qualifying income and thereby reduces the loan balance available to borrow.

In the future, demand for second mortgages will prompt some adventurous lenders to try this market again. Currently, lenders hold billions of worthless second mortgages on their books, so originating new ones is not in their business plan. To make these loans today would be to light more money on fire as falling house prices will quickly put these second mortgages underwater. It won't be until well after the market bottoms that second mortgages will be made available to the masses again.

For the foreseeable future, mortgage demand will remain weak. At first it will be due to continuing unemployment and weak earnings, but as the economy recovers, the reasons will not be income qualification, it will be the lack of a suitable down payment.

More than 25% off it's new 2004 price

i remember watching with amazement as people paid outrageous prices for these Northwood II homes back in 2004 and 2005. Most of these buyers put 20% down as there was so much demand that builders on the Ranch could be choosy. Nearly all of those buyers have lost their down payments, and any who refinanced are underwater.

Many of these properties were bought as investments, after all, prices only go up in Irvine -- except when they don't.

At the current price, the low interest rates are making this place payment affordable even with the sky-high HOA and Mello Roos.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  35 WONDERLAND Irvine, CA 92620
Resale House Price ......  $559,800

Beds:  3
Baths:  3
Sq. Ft.:  2146
Property Type: Residential, Condominium
Style: Two Level, Mediterranean
View: Faces Northwest
Year Built:  2004
Community:  Northwood
County:  Orange
MLS#:  S643218
Source:  SoCalMLS
On Redfin:  198 days
DOUBLE MASTER BEDROOMS: ONE DOWN STAIRS, ONE UPSTAIRS! The third bedroom is downstairs, too, large and with a private bath. Very spacious, clean and well maintained home. Upgraded cabinetry, computer niches (more than one), corian counters in two full baths, double sink vanities. UPSTAIRS MASTER HAS LARGE COUNTER WITH SIT DOWN LADY'S VANITY! Lots of living space and room for a family. Desirable interior facing location, super quiet and private. Lots of windows, direct garage access. Kitchen has stainless steel appliances, including refrigerator, granite counter tops, five burner stovetop, built in oven and microwave. Kitchen counter sits four people, room for a large dining table. Enclosed patio, accessed by french doors. Upstairs, in front of master, large loft, a second living room or multi-use area. Very open and bright. Behind the gates, beautiful common pool and recreation area. 
Proprietary IHB commentary and analysis

Resale Home Price ......  $559,800
House Purchase Price … $712,000
House Purchase Date .... 9/30/2004

Net Gain (Loss) .......... ($185,788)
Percent Change .......... -26.1%
Annual Appreciation … -3.4%

Cost of Home Ownership
$559,800 .......... Asking Price
$111,960 .......... 20% Down Conventional
4.48% ............... Mortgage Interest Rate
$447,840 .......... 30-Year Mortgage
$97,021 .......... Income Requirement 

$2,264 .......... Monthly Mortgage Payment 
$485 .......... Property Tax (@1.04%)
$200 .......... Special Taxes and Levies (Mello Roos)
$117 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$292 .......... Homeowners Association Fees
$3,358 .......... Monthly Cash Outlays

-$377 .......... Tax Savings (% of Interest and Property Tax)
-$592 .......... Equity Hidden in Payment (Amortization)
$185 .......... Lost Income to Down Payment (net of taxes)
$90 .......... Maintenance and Replacement Reserves
$2,664 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$5,598 .......... Furnishing and Move In @1%
$5,598 .......... Closing Costs @1%
$4,478 ............ Interest Points @1% of Loan
$111,960 .......... Down Payment
$127,634 .......... Total Cash Costs
$40,800 ............ Emergency Cash Reserves
$168,434 .......... Total Savings Needed

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