The 20% solution: personal savings rates and homeownership

My father reminded me that the 20% down was common during his years in real estate. He also noted that the average homebuyer could save this 20% within a reasonable time 2-3 years and then build the value in the home for the next bigger purchase. He also noted that homes did not cost nearly as much and salaries and the cost of general living were much more in line and would allowed for a larger savings each month. He did some quick calculations for me on the average home price of $175,000 and it would require a $34,000 down payment. That would require a $500 per month after taxes to be saved for 68 months to reach that goal. Any interest made would be needed to cover additional fees required by the buyer. This type of requirement will only further depress the middle class and shrink their ability to own a home.

In reality the down payment did not cause this problem in the real estate market. It was all due to the lenders leveraging our loan dollars 11:1 and as much as 30:1 thru the use of mortgage backed securities and credit default swaps. When the credit markets in July 2007 figured out that scam by our banks the credit markets froze. That was the start this whole mess and the homeowners and our economy has suffered from the “pure greed” our banks run by.

As a fellow UCSB Grad I am glad to see you making your living writing. I would love to join you but I am afraid that my opinions may preclude that possibility.

I do not share your enthusiasm for the Dodd-Frank bill. When it was needed was in 2002. Today it will act as a vampire sucking what little life remains in the industry. I firmly believe that if the housing industry gets going the rest of the economy will follow if the government doesn’t persist in trying to regulate all the life out of other sectors as well.

The idea not particularly bad in theory, but is ill-timed. We ran for decades with 3% down FHA and Zero down VA and 5% down conventional loans. Don’t forget the 25% down sub prime loans and EZ doc loans. These were and still are all good programs. It was no coincidence that one of the first to fall was Fremont. They were one of the first to offer 95% EZ doc loans. Of course, they were at a premium rate. Had it stopped there we might not be having this conversation.

Even Bernanke admits that current underwriting and documentation guidelines are too harsh. Part of the intent of current regulation through TILA and Reg Z was to discourage and eliminate mortgage brokers who might buy First Tuesdays products if they were still in business. Sadly most are gone. Even large banks that are exempt from many of the regs are contemplating an exit. QRM may have it’s place, but if the standards are anywhere near as high as anticipated the foreclosures will continue to mount unless special financing is put in place.

The borrower and the lender need to do the calculation to see how long it will take for the effect of the lower interest rate to make up for the cost of the refinance, read more about refinancing your home at “123 Refinances”

The large down payment will be sidestepped by sellers and buyers engaging in alternative finance such as all inclusive trust deeds. Say goodby to the bank. No closing costs. None to limited down payment adjustable terms such as a 30 year note due in 5, which can also be renegotiated.

I 100% agree with the 20% down theory. I own many properties and always put 20% down to purchase but now have lost all of that plus some due to irresponsible people being able to purchase properties with no or little to lose. Why should you be able to purchase anything with out putting $ down?If you can’t save the money then rent!