It's not just a matter of saving $20K if a $100K house budget gets you laughed out of the realtor's office. It might be $40-60K to get that 20% payment. And if prices rise fast enough, when you do manage to save 20%, that mortgage is going to be a LOT bigger.
Say a little townhouse in a major city starts at $200K. Which is not unrealistic for anywhere the job market's been decent.
It's a strong market and so home appreciation has been 10%/year. Not the blistering 20% like Miami or certain areas of California, but definitely above the norm.
Joe Schmoe graduates from college, gets a decent job, settles down in a little apartment. He watches the housing market.
He starts saving for a down payment on a home. Renting is still cheaper, but the rents are rising in lockstep with home appreciation, eating more of his income each year, if his friends who graduated a year or two before are any indication.
He eyes that $200K townhouse. He's able to sock away $10K toward the house, but a 10% rise means the next year the price is $220K. What was a 5% down payment is a little less, and he might not qualify for the same/better mortgage programs if he has under 5% downpayment. Wait another year. He has $20K saved, the home price is now $242K. He now has around 8% down payment, but if he puts that $20K down, it amounts to a mortgage of $222K. If he'd put $10K down last year, he'd have had a mortgage of $210K. If he'd been *really* aggressive and bought a place right out of school, he'd have paid $200K (and might've refinanced for a better rate at this point).
Year 3: the house would be $266K, he'd have $30K to put down, and a mortgage of $236K.
And that's assuming a person able to save a fair amount of their money. If they *don't* have that sort of budget room, and their rents keep rising, they were squeezed into fitting a higher rent payment in, or going for an ARM that would level out their payments for a few years, at least.
Now, the banks see this and say "we're turning away too many customers, let's loosen the terms." Enter more 100% financing, interest-only options, and all the other crap that let people who were really better off renting, "get on the property ladder."
And the price appreciation rises to 15%, putting even more pressure on rents and housing costs, attracting amateur speculators, and scaring people into getting on the bandwagon at any cost lest they be priced out of town within a few years. Rock, meet hard place.
And, some of those fools cashed in on paper equity for shinies, leaving themselves no wiggle room in a price correction. No sympathy for them.
Now, a strong, responsible person might continue to rent and ride out this market, but it takes a LOT of guts to do so. And you can only afford those rent increases if you had cash flow to spare- which not everyone does. Move to a lower cost of living area? Easier said than done, and not everyone's situation allows them to move to a different region of the country. |
