The issue of mandated down payments is back in the spotlight as a recently released study found that requiring by law a minimum down payment of 20% would have a dramatic, negative short-term impact on the housing market. The study, released by the Center for Responsible Lending at the University of North Carolina, found that implementing such a mandate would push out 60% of would-be home buyers from the market.
As you can imagine, the topic has garnered criticism from both sides. While many say that requiring a minimum down payment would be better for homeowners and the economy as a whole by protecting us from defaults and stemming foreclosures, others say that it unfairly bumps out otherwise qualified home buyers. And the delicate state of the market in many areas would feel an impact from such a move.
What’s my take? I think a “back to basics” approach to housing in general is a good thing. Would-be buyers should be willing to put their own skin in the game so to speak for many reasons. For one, they’ll be starting out their ownership journey on a much better financial foot – namely, they likely won’t be ruined by the first financial curve ball that may come their way. Secondly, the more you put down the better your loan terms so the overall cost of ownership actually does decrease in most instances.
The problem though is high-cost areas like our very own Silicon Valley and the Bay Area in general. Twenty percent is no small feat for most of our local buyers, considering the median cost of a home across the Bay Area is currently around $351,000, according to DataQuick. That’s $70,200 in cash that a buyer would need, which doesn’t even include closing costs – which we’ll estimate would be another $10,000-$12,000. And let’s be realistic: that median price is quite optimistic for most people’s situations. To get a home in a safe and secure neighborhood with good schools, we’re talking much higher for most of our cities.
This is why I think a blanket minimum down payment mandate is potentially dangerous. It could seriously polarize the market in high-cost areas, leaving many otherwise qualified would-be home buyers out in the cold. And that just doesn’t feel right.
In addition, a lower down payment doesn’t always translate to loan defaults and foreclosures. How else could you explain the existence and longevity in the FHA loan program, which enables qualified buyers to buy with much less cash down?
Thankfully, while the standards for the bill that would put this mandate in place will be heavily debated over the next year, we’re not likely to see anything implemented in 2012. We can thank the election for that as politicians historically have shied away from such hot-button housing policies that have the potential to polarize voters.
I do expect this will be talked about though, and it’s not going to just go away. But if you’re in the market to buy a home in a high-cost area and don’t have the 20% in cash, you can consider it another reason to move quickly!