Credit squeeze: The problem with down payments

News item, and then an e-mail from a reader. First the item, from Reuters: "As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply. ... Gone are the days when almost anyone could get a loan with a down payment of less than the traditional 20 percent."

Now the e-mail, from reader LTL: "Today I went online to try and see what I would qualify for if I tried to get an FHA loan. A bit about me, I'm 29, married, with two young children. I'm a lawyer, with household income of $225k/year. We recently relocated back to LA.

"Knowing that the new Freddie/Fannie limits had gone up, Today I went to the FHA website to see what I could qualify for. I saw that the L.A. County mortgage limit had increased to $729,750, which coupled with a 3% down payment, yields a maximum purchase price around $750,000. Or so I thought. Upon running my numbers (225k annual salary, $500/month car payment, $900/month education loan payment), I only qualified for a FHA loan of $362,790 with a 3% down payment of $10,973. It calculated a total monthly housing payment (PITI) of $3661, leaving me over 10k in left over income. 

"The same calculator also yielded what I would qualify for with a "conventional" loan. I apparently qualify for a " conventional" loan of $672,378 with a down payment of $118,655, for a total maximum purchase price of $791,033. My monthly housing costs would be $7,472, leaving $7,541 in remaining income. So that's almost 50% of my income (and I haven't figured out how the calculator figures my take home income) for housing.

"I don't think most people have my annual income, I feel very lucky to make what I do, and I know that census statistics back up my contention that the percentage of people who make more than me is very small. So obviously, the FHA loan program is of little use to buyers in L.A. If I can't qualify for the maximum amount, who can?  And if I went with the conventional loan, I would need over 120k in the bank for a down payment. How many people have that sitting around? Not many. Most buyers over the last few years have put nothing down, let alone 6 figures.

"I would especially be interested to hear what the real estate agents and Cal have to say about what they are seeing when people attempt to qualify."

Thanks, LTL. Before I ask for comments, an observation: I know many here believe the market should return to the days when a sizable down payment was required to purchase a home. If that comes to pass, the California market will remain weak for quite a while. If you take low-down-payment buyers out of this market, you shrink the pool of buyers sharply.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[Milla]

thanks for posting this, pete. i got jumped on the other week for talking about low downs and 40-year loans, but without a little bit flexibility for the first-time buyers who are good credit risks and live in pricey markets, homeownership would be something reserved only for the rich -- and given LTL's case, maybe just the super rich.

i know, prices should fall until they're 3x one's income and all that, but with rising energy costs, food costs, healthcare costs, education costs and every other expense that's risen at the speed of light, 3x won't cut it either.

[Joe]

What's so surprising about that? A household with a 200K income should be living in a 500K home. The real estate market is still incredibly bloated as home values are way out of line in comparison to incomes. Market prices need to come down a lot.

[Pasadena]

I agree with LTL. I'm a lawyer, make $265K per year and have $180k for a down payment. I have a low car payment and low student loan payments. If I get a loan for more than $700K, it really starts to hurt and I would be stretched very thin. That means I could reasonably afford a $900K house. Unfortunately, all the available $900K SFH's are tiny (under 1700 sf) or too close to dangerous neighborhoods.

[Uncle Billy Climbs Mont Pelerin]

re the broker referenced in the zillow article: first of all, he's not a broker, he's licensed as a salesperson, reuters. 2nd... both he and zillow live in wacky world. The house is right on a fairway at the wilshire country club. Sounds like it should command a hefty price even in a down market, right? Reuters values his 6 bedroom, 6200 sq.ft. home at $6.2M. The salesperson has it on zillow at $7M. If you look around at the surrounding homes, they're all in the $1.3M to $2.3M range. His neighbour to the north has a 13,000 sq. footer with 9 bedrooms that is *zestimated* at $1.4M.

Now... his complaint: "I can't get one dime out. I don't like feeling like I'm trapped and I can't tap equity."

According to the article, he has $3.5M in debt on the house. Well, if only a nitwit would pay more than $1M-$2M for this place, he just won't get that big chance to "tap equity."

Dear Lord, there are 10's of thousands more just like him or more befuddled.

[Melissa]

I'm sorry, but not having a sizable down payment with that sort of income is quite ridiculous. My husband and I make a combined income of $106,000, and we were able to save and put down $105,000 for our first home purchase in Nov. People want to have their cake and eat it too, but sacrifices must be made (ie, less trips, less expensive cars) to invest in a home. Don't feel sorry for this guy.

[Roger]

I am not sure why people talk of 20% downpayment. I got qualified with Bank of America and Citibank with a 10% downpayment for upto $380K. I would put down 10%, so for a $400K home, I am can put down $40K. My annual salary is $120K. No debt, no car payment and currently rent for $2,200 in downtown LA. So of course I cannot buy in LA. So I am looking to San Diego area, far from the ocean, far from downtown San Diego. I see condo's for about $200k. I work from home, so don't need to commute. Anyway, point is I don't understand why the 20% is being thrown around, when I got qualified with a 10% down. And also, it obviously means people like me cannot afford LA at all,
so fewer buyers, should mean the prices will come down even more. Comments are welcome.

[Cal]

I just bet the calculator hasn't been updated, LTL should talk to 3 lenders, a broker, a big bank and a local credit union.

That will give him the breadth of the available products.

Stated income has very high down payment requirements (25-30% for many programs) and a 4506-T signed (they can check your taxes if they want). But the full doc stuff can still get lower than 20% down payments.

Returning to sound underwriting and reasonable down payments means a smaller buyer pool until prices adjust to the new reality. This new reality looks a lot like the previous years before subprime and securitization. It is just people look at the past few years and can't imagine things being anything but like that.

It isn't my decision or your decision, its the banks decision of what constitutes sound underwriting. The boom happened because sound underwriting was lost. The return to it will be painful for some and welcomed by others. But the whole issue boils down to that it should never got to that point to begin with. But politicians being politicians will try to "fix" things by "solving" the issue and creating programs with low down payments. All that will do is ensure that taxes go higher as we pay for bad underwriting.

[skepti-Cal]

"I apparently qualify for a " conventional" loan of $672,378 with a down payment of $118,655, for a total maximum purchase price of $791,033. My monthly housing costs would be $7,472".
----------

Fuzzy math.

Just put these numbers into a very cool housing cost calculator:
http://www.arooly.tv/financedisplay.php?tool=2

$790K purch
$118.5K (15%) down
5.75% First
7% Second
1.125% Tax
0.250% Insurance

Monthly payment: $4856

That's a +/-$2600/mo difference.

You sure you entered the numbers right?
Even with a 8% First and 10% Second I get just $5889.

A 10% First and 12% Second only gets to $6858.

Just how bad is your credit????

[mrincomestream]

"...Thanks, LTL. Before I ask for comments, an observation: I know many here believe the market should return to the days when a sizeable down payment was required to purchase a home. If that comes to pass, the California market will remain weak for quite a while. If you take low-down-payment buyers out of this market, you shrink the pool of buyers sharply..."

And what exactly is your point...would you rather folks continue to lose their homes enmasse because they strayed away too far from the fundamentals or a return to a somewhat rational market...

The guys email shows you just how out of whack the market is here in Los Angeles...

[tealeaf]

This is precisely the issue: credit remains much tighter than the past few years.

It is the perfect corrolary to the crazy, suicide loans that drove the prices up - including "high end areas" (inflated by surrounding values, which have cratered).

Real value was not created during this period: we
solved for asset value based on an exploding monthly payment granted to folks who couldn't otherwise get into the home.

And it all happened on the margin - both up, and now down.

[Anthrodiva]

We live in Riverside, not LA, and make as a household 100K, and not 225. We are closing on a 2000 sq ft house on .3 acres for 291K on an FHA with 3 percent down and we have found the process to be a breeze.

Of course, we did our homework and have money in the bank, but things are nowhere near as dire as this guy paints them out to be.

Oh, and that house? 50% discount from 2006. An REO priced at $134 per sq ft whihc is where I figured Riverside should be based on the Case-Shiller index. There are still nutballs out here crossing their fingers and hoping the sky will stop falling, but banks are not among them.

[tealeaf]

Cross linked from the article referenced above:
http://www.cnbc.com/id/24774352

"Combine the high loan-to-value ratios with falling prices and homeowners saw what little equity they had disappear, and with it their ability to refinance into a more sustainable mortgage and their incentive to try to stay in their homes."

[Roger Moore]

"And if I went with the conventional loan, I would need over 120k in the bank for a down payment. How many people have that sitting around? Not many."

Not many people have that much "sitting around" because most people have gotten out of the habit of saving. Back when 20% down was normal, it was also normal to save for years to be able to make the down payment. Switching from 0% down to 20% down being the norm is going to be a major shock to the system, but people will adapt pretty quickly if they learn that's what it takes to get the house they want.

[bob]

What this tells me is the real estate pricing floor is too high. The market has another 15 to 20 point decline before prices equalize. This represents another 100,000 plus equity dump. Secondly, as the market equalizes pricing, we could see a return to "Creative Financing" gimics that dominated the 80's housing market when inflation was running at 12% and interest rates were 18%.

In addition, the increase in court house steps foreclosure sales should not be extrapolated as a bottom to the market. Rather it should be intreperted as the real estate market equlibrium point.

We are no where near the bottom of this market

[Steve]

It is simple move, as a lawyer you will make onaly 20% les, yet housing is 50% out of state.

[david]

Aww, the beauty of paper money, the banks can make as much as they want and give/lend away just as much.

America needs a home loan of $13 trillion when there isn't that much money to being with? No problem, the government can make them as fast as you can press the enter key.

Was it Mark Twain who said that inflation is the first sign of a mismanaged economy?

BUY SILVER AND GOLD, PEOPLE. You still have time to save yourselves.

[Laker]

Peter, so what do you suggest? Bringing back stated income with neg Am loans and ZERO down???
What do you want the bank to do if they see houses falling 20% annually?
One of thing we see that borrower is defaulting after being in the house for 8-24 months. That means, there is a huge chance the current borrower will default if the market will be 20% down next year. Banks know that and most sane banks require 20% down. That will be a cushion in case it does happen. Anything lower than 20% and the risk is really to big.
If the big shot lawyer can't find $100,000 cash in his bank account for a down after pulling in $225K a year...he should not buy a house. Obviously he lacks the ability to control money. With such an income, you should be able to rent for 2-3 years and easily save $100,000-150,000 in the bank.
People that have only $10,000 in their whole savings, should not be in the business to buy houses, THEY SHOULD RENT !!!!
Why is this so hard to understand, If i don't have the money to buy Lamburgini, I don't buy it. Loans less than 20% in cash down do bring skin in the game, they just enable gambling and craze and should be against the law. During the 90's bust there were many people that lost homes to foreclosures after having put down payments of 10-20%....Today we see foreclosures because there was 0 down. That is enough info to guarantee lifetime record of foreclosures and you know what that means...

[x-man]

What a story from the frontlines. Volumes of truth contained in this anecdote. Proves the run up in prices wasn't about demand, it was about easy money. Now that the credit tide has turned, coupled with foreclosures (now commonplace in Los Feliz and Beachwood, even showing up in the Platinum Triangle), the westside is relegated to the same fate as the inland empire: 60% off from peak pricing.

[E]

10% down w/ PMI, 20% down without it.

So...as Pete says, it leaves some people out of the housing market. Supply & Demand create rational prices. Perhaps the 5% down that a person might have had will become 6-?% down as prices normalize. Meanwhile, it also gives them time to prioritize their expenses and if buying a house is a priority, they will sacrifice other things in order to save up that 10-20% down. Some will be able to get help from parents, some won't. That's life.

[Mmm... donuts]

In my view, shrinking the pool of buyers is fine and even desirable. A large portion of the new buyers over the last few years really should have still been renters all along. Requiring a commensurate down payment is a time-proven method from ensuring people take the obligation they're entering into seriously.

[Danny]

I've been saying it all along. The knife-catchers who are currently buying houses are a very small subset of buyers - those with cash-on-hand for the 20%+ down payment. The numbers of these buyers are dwindling fast. And pretty soon even those who think that buying a house at 20% off-peak pricing is a good deal won't be able to make that (stupid) decision to purchase. They just won't be able to get the loan. When prices fall to the point where people once again can make a 20% down payment, then we will have reached the bottom. And that will happen when prices are in line with medium-income. And that will happen when we return to around 2001 prices. There's no stopping this train. Banks aren't going to make any more risky loans. There's nothing in it for them. There used to be, back when everyone wanted to put all the world's capital into mortgage-backed securities. Now that real estate investing is taboo, there's no reason for the banks to take a risk on mortgages.

I'm a little confused with the poster's numbers, though. What kind of sky-high interest rate was the bank quoting him to give him a $7400 monthly cost on a $791,000 house. Even with 0 down the monthly cost shouldn't be that high.

[Josh]

Interesting post. I agree that if Southern Californians need to put 20% down, housing prices will reset much lower over the next few years since savings rates are negative in this country right now and we in SoCal are known to live well beyond our means.

That being said, check out yesterday's Santa Monica Distress Monitor post on people who are waiting on the westside. The majority have substantial incomes and downpayments:

http://smdistress.blogspot.com/2008/05/
tell-us-about-you.html

[perks]

LTL: I plugged in my own income/expense numbers, and the FHA site "qualified" me for the exact same amount: $362,790. It gave me the same figure if I entered my income at $900k per year (I assure you, it really isn't!).

I don't think the days of the traditional 20% down are headed back in the immediate future; the sad truth is, the market would collapse entirely if they did. Anecdotally, I know from friends in the mortgage industry that to this very day you can easily find loans of up to 95% LTV through major lendors (BofA, for example); the only catch is that--imagine this--you have to have decent credit and be able to document your income.

[E]

OK...after reviewing the story, let's run the numbers.

We have Manny Torres, a "freelance T.V. camera operator"...who before deducting for work expenses and health care makes $100,000 annually.

Does he make that *every* year? How far back can he document his income? How many "lean" years did he have and how "lean" were they?

Moving on...His work related expenses are set. He *doesn't* make $100k. He makes $70k. Period.

He bought a 600k place on a 70k income whereas he really could afford only a 280k place if he were stretching. He depends on $2000 month from his rental to cover an additional 320k worth of a mortgage. Not to mention that he has more sf to maintain, higher taxes, income tax on the rental income (I assume). When/If the tenant moves out, how long will it sit vacant? That is an unknown.

Oh...yeah...do all those actors/writers/etc. strikes affect his job? How stable is it *really*? I hear it's pretty dog eat dog in the industry. Could a younger and hungrier TV Camera operator underbid him?

He's already stretching. I wouldn't loan him any money either.

Next...let's look at the other candidate. Craig Van Skaik.

He's a mortgage broker. How is his income this year compared to the bubble years? He is $3.5M in debt. Run the figures on how many $3.5M+ houses have sold in the last 6 months. Compare that to the inventory (don't forget about those "pocket listings")...pretty healthy MOS.

Why does he need the money? To keep himself afloat? To service the $3.5M in debt that he already has? Who knows...but if so...isn't that just "robbing Peter to pay Paul"?

Let me propose this question to you Pete. If you had the money...from the little bit of information that we get from the story...would *you* lend it to these people?

[IToldu2CashOut]

Interesting. I am the opposite. I could put 20-45% down if I wanted, but only make 80k. Have over 200k saved. I do pretty well in buying and selling stocks ontop of what I get from a salary. I just can't see a house as a good investment when I make 10-20% on my money investing and housing will continue to decline. Once houses reach a reasonable price I will reconsider. I just don't want to have 60% of my income going to a house payment. Would change my lifestyle bigtime since now I pay $1100.00 and live on the westside. Just doesn't make sense to buy when you can rent for 1/3.5 the price. Its not always what you can do, but what you should do and what actually makes sense. Right now it makes sense to wait. Renting is saving money. Buying is throwing money away for now.

[digitaljmh]

The problem is most people don't look deep enough into the lending market. There are still 80/10/10's available for up to the new conforming limit for LA county. If you have good credit, high income, and cash in the bank, you can do anything.

There's no excuse for the e-mailer to not be socking away at least 5k a month in savings, especially if he is still a renter. If he can't save 120K on his income, that's his problem. It should only take 2-3 years at that level, if you are truly committed.

The days of free money are gone, get over it already. That doesn't mean that people are going to stop buying houses, it just means the conservative people who save will be the ones with the upper hand for the next round. It's a cycle, give it time and the money will get loose, just not the same as before.

[Laker]

We need to understand the reasons behind home mortgage being 6%. This is only because by definition, the risk is very small. VERY SMALL. The collateral would in 99% be worth more than the loan amount, so the lender could recover the debt.
HOWEVER, if there is relatively high chance that collateral will not cover the debt, interest rates can't be 6%. The risk is simply way to high and is much closer to credit card interest rate than to mortgage rates. I think that zero or very low down payment should be available for some that need/want it. But it should carry 15-20% interest rate. If you want a loan with 6%, you better prove that there is no chance for default, (or at least very minimal risk to the bank)
Low risk = 6% rate
High risk = 16% rate.

[skevh]

"and we in SoCal are known to live well beyond our means."

that's because you have to live beyond your means just to live like an average person anywhere else in the country.

bring on the bust.

[someday the ants will eat grasshoppers]

Like others have said, LTL, you're way off on your calculator. You're easily going to check in under $5K per month unless your credit is terrible.

But let me ask you: if you had over several years saved the six figures, would you be as eager to risk it in the LA market? It's easy to get excited about real estate when your risking the bank's money and not your own.

I have enough cash and income to buy the house I want (in the $1M+ range), and I'm still not buying. Every day I rent, I'm saving about $500 off the eventual purchase price--possibly more. At $150K saved per year, that's not a bad "wage" for being a professional renter.

Those of us on this blog in the market for a $500K home are still "making" $75K a year by waiting it out in a rental. Kudos to all the renters and their discipline.

LTL, $225K per year is nice, but be patient, don't blow it. Raising two kids is expensive, and you'll be glad you saved in your 20s and early 30s. It makes a huge difference later.

Stay out of the market until you have the 20%. Better to be the ant, given what's coming down the road.

[Nick]

I would love to see the market require a 20% down payment again. I'd also love the government to not put my money up to guarantee loans with 3% down, ever, especially on properties which are with more than 3x someone's annual, sustained income.

Prices are way out of proportion to income, and they are adjusting as they should in a free market. The only reason people can still buy houses they can't afford is corrupt and/or idiotic politicians not serving the peoples' interests, and lenders "banking" on a bailout.

I have no problem with independent banks making more risky loans than 20% down and 3x sustained, documented income, but they alone should bear the losses when people default on them. I'm personally disgusted whenever I read/hear about someone implicitly thinking of their home as an unlimited ATM for withdraws, especially when it's ultimately my taxpayer dollars they are living beyond their means with. It has to stop, and if housing finally gets affordable again in the process, it would be a win/win.

[Nelcisco]

I been Beating this drum for the last 4 years.

I was born and raised in the Los Angeles area all my life, a have son born in Burbank where my wife and inlaws are all born and raised. I decided to leave the L.A. area in April '02. Moved to the Seattle/ Tacoma area for obvious reasons that Burbank was getting pricey at the time.Went to visit that Christmas and saw those same homes jump about 20% from Apr. of that same year, the whole family said "come back home we miss you", my wife I said no way, we're priced out.

I got into the mortgage industry in '04 up in Tacoma Wa during the boom, my brother in LA was excited I was a loan officer, as an LO I priced out loans and put files together. What I found was that most people were crazy to do a stated loan and irresponsible for lenders to underwrite them. I'd ask my brother how people in LA were doing it, not knowing about loans or how they worked he said he had LO friends that were making 8k to 15k per loan and I should come back home & take advantage of this "gold" rush. I said the bubble has to break sooner or later, NO WAY he said, everyone makes $ in L.A., I thought to myself not everyone has a TV series and make 250k a week and when the bubble bursts It'll be a catastrophy and here we are now.

I came back in February of last year right at the time of the subpime meltdown to do loans in LA and its been extremely difficult to make a deal work, its been a nightmare.I live in the central coast now and I'm happy Im here, forget LA, Kobe Bryant doesn't mean that much to me

[Cal]

From the tealead CNBC link: "
"Taken individually, these risk factors may not have significantly raised the likelihood that a homeowner would fall behind on payments; taken together, however, these risks materially increased this likelihood," Kroszner said."

Risk layering. If you have a high LTV ratio, as equity is the main protection the lender has against loss, then everything else better be rock solid. Appraisal. Borrower credit history (not just FICO), lower front end and back end DTI, documented income. Something has to give, it can't be something for nothing.

This is what you are seeing with stated income now, they allow it but everything else has to be solid. Especially the down payment.

So a perfect borrower with a great job history, proven use of credit, has reserves, the housing payment is reasonable (even conservative) relative to income, in a stable market. Should be able to get low down payment loans. But once other parts start to slip something else has to be tightened to make up for it. And I think only down market conditions should be a factor otherwise you can create a reinforcing cycle that would allow yourself to loosen underwriting too much. Once the market is stable or better market conditions shouldn't be considered.

[Tanta]

That calculator you used does not ask you for the location of the property.

You will note that it tells you its maximum loan amount is based on "national averages."

What this means is that you got "cut off" at the national average loan amount, long before you stopped qualifying based on income.

This tells you nothing, unfortunately, about how a buyer in LA would be qualified for an FHA loan.

No calculator in existence will give you a geography-based answer unless it provides some place for you to enter your geography.

[gary]

only the arrogance of thinking LA or OC is the only place to live is why he has problems. Along the 15 south of the 78 thru to SD have many great homes. But, i would watch out for any half way done new homes. There is no infrastructure and there will be no infrastructure regardless of what the builders say.

[oc not 4 me]

hey laker.................................have read you many times and you actually make more sense than most. unfortunately many people still live in fantasy land. such as the re salesperson in the reuters story. he will go into foreclosure long before he can sell. i know (occupation kept secret) too many of the r/e salespeople and loan types and they are all crying the blues and still driving the MBs and beemers and still trying to show the all powerful "illusion of wealth" syndrome. I actually like them but I personnally now drive a used honda and actually have some money in the bank.

[Long time listener . . .]

Thought I'd jump in, apparently the Ginnie Mae calculator was way off.

Also, just to clarify, I'm a huge bear on this housing market. My only reason for the email was to point out that I think that the new FHA loan limits will not impact this market at all. Many people seem to think that these new loan limits are a savior, but they are not.

As far as conventional loans, my point was that if you have to pay 50% of your income to get a very average home in a very average neighborhood, its unaffordable. And people will not qualify for loans at those DTI ratios.

PS - thanks for the commentary on my apparent lack of savings. Very encouraging that so many of you are worried about me not saving enough money. I appreciate your concern. But note, I never stated how much I have to put down, just pointed out what it would take, and how out of reach that is for the normal buyer in LA. That was the point. Now I'll go look at the apparently much better calculators out there.

[perks]

Tanta: You actually CAN enter your geographical information by running the calculator, and then clicking on the "Detailed Estimate" to select your state/county and some other details to get a revised figure.

Unfortunately, it still caps you at a loan amount of $362,790 no matter other numbers what you enter.

Is it any surprise that a government-run website is utterly useless?

[Susan]

Peter, I think you missed the story about the FHA program with nothing down. Not all the loopholes have been plugged up.

No down payment? No problem!
http://www.msnbc.msn.com/id/24580917

[Steve]

"With prices collapsing, the incentive not to buy a home is increasing by the week, and with inventory showing no sign of improvement, prices will keep falling," predicted Ian Shepherdson, chief U.S. economist at High Frequency Economics.

[Jeff S]

Just guessing, but I think y'all are misunderstanding the housing cost number. It appears to me that it includes an estimate of property taxes and perhaps mortgate insurance or the like.

Lots of people like to ignore those housing cost numbers but they are definitely part of the price of ownership.

[Laker]

Thanks oc not 4 me. I just post what i see and i don't make money in RE (no investment properties) so I have no agenda.
Just yesterday, I found that one of the houses i was following on my blog got "sold".
"sold" as in fraudulently sold to a straw buyer. I'm amazed and shocked that today with all the mess, so stupid bank was found to fund a $700,000 loan for a house worth maybe $500,000 or less. This house was sold at peak for $750,000 and a flipper bought it for $500,000. Then he slapped a coat of paint and cut the weeds and listed it for $725,000...The house was sold withing 2 days and no sign was even posted... I will post details on my mini-blog soon. Fraud in the middle of day light when banks are seeking a bailout...GOD!

[TakeFive]

LTL - you're focused on getting a loan and not a property; as in "I can't do B unless I first do A"

You're a lawer making damn near a quater mil under age 30! You have some skills, right?

Find a white collar criminal with a nice home and offer to fix his problems for a quit claim to his house. In my old neighborhood, one of the nicest homes was owned by a bail bondsman. Want to guess how he got it?

[Cal]

The NAR press release has been very lending based lately. Calling things restrictive and talking about declining market polcies. Like a Realtor knows underwriting.

What is happening is they are lobbying Congress, they will get the FHA and GSEs to loosen up. Political underwriting, we all pay. Realtors don't care how much it costs others, they only care how much it costs them.

[Westside Renter]

I'm a long time reader and occasional poster on this blog. Like many here, I have a good income and a large amount of money saved for a down payment, but I'm sitting on the sidelines waiting for prices to return to some type of normalcy. I'm just curious what the general consensus here is for the bottom in prices on westside houses.

For example, I'm looking at 3 bedroom, 2 bath houses, all well under 2000 square feet, in Westwood, Cheviot Hills and Rancho Park. The average price seems to be $1.1M +/- $200K depending on the location and the condition of the house. I think those prices are ludicrous.

What does everything think is the "right" price for just an average 3/2 house (I'm not talking remodeled with the Viking stove, just normal) in those areas?

Is $700K for an average 3/2 house in those neighborhoods just a pipe dream? Or will they actually fall that much?

Cal, many of us here respect your opinion. What do you think?

[ss]

All this talk about the guy making 225k a year and not having $100k in the bank in 2-3 years ignores the obvious: he loses half of that to taxes. At 225k he is going to get hit with the AMT on top of it all. And to the guy who can't find anything for less than 900k, look in suburbia. Not being realistic. You commute, but the lifestyle is superior to the city, and far safer.
I just don't see a problem with 10% down. I have done 5% down in the past, and done just fine. You rent until you can afford the payment, that's all, or adjust your priorities and buy a smaller, older home, and put in some sweat equity.

[Rich]

Susan's comment would be a good place to jump in and talk a little about FHA and VA. These government agencies do not lend money, they insure loans made by private entities. In order to qualify for government-backed FHA and VA insurance the lender has to meet some stringent standards, including higher-than average credit ratings and an independent appraisal by an FHA-hired appraiser. The value of
FHA/VA insurance is that the loan becomes top-shelf salable in the securitization market. To the extent that the securitization market is still functioning, these loans are probably being bought up without problems.

The issue here seems to be that FHA is under pressure to increase its risk in order to serve as a foot-soldier in the war to fix the broken market. A loan for a home whose price is so far above median income as LTL's increases the risk of default because problems such as temporary unemployment are more likely to cause default (income from temporary employment won't cover expenses as it often would for subprime buyers, and the house is harder to sell to discharge the loan).

LTL was very lucky that FHA's low-down-payment options were available for the jumbo he was looking for, but if he still couldn't stretch there with a 3% down payment that's a good sign that he should set his sights lower. The readers of this blog know by now that his house is going to be a $500,000 house by Fall, so FHA saved his bacon.

I don't agree with the readers who think low-down payment loans and market securitization are universally bad; they are absolutely vital to a healthy housing market. You won't have a housing recovery without them; it does no good to have your desired house fall to the price you want and then find out first-time buyers can't buy your existing home because nobody can afford a loan at 20% down...

[Laker]

Rich, you have two major mistakes:
1) You said :"...FHA requires... including higher-than average credit ratings.." BS. FHA could be donw with FICO of 580-620 as long as it is FULL DOC and DTI rations are met. I don't think 580 FICO is higher than average, it is more like a sign that the borrower is a bad credit risk.
2) You claim that 20% down requirement is bad because: "...first-time buyers can't buy your existing home because nobody can afford a loan at 20% down..."
Well, when people start to save instead of spend beyond their means, they will have 20% down and therefore could afford the loan with 20% and the house too.
Until then, they have the available and relatively affordable option to rent.

[Inland empire]

LTL I understand your reply and I'm not trying to judge your fiscal status. My question is your nice area ought not be what sways your home buying decision. School and transportation are the things I find the most important. My job was at the junction of the 710 and Washington Blvd and I drove to San Bernardino. I wanted a home my income required going away from the city to afford one so we move to Ontario. It was nice, quiet, great school and 25k (1966)for a new home. The thing that was not worth it was the drive as the population grew the drive got longer. So if you can find a home you like with good school close to your job that is more important as long as you can afford the payments. But I must say with your income I don't understand your problem. Maybe you want a little more home than you really need. You've got the time to build wealth one day you will have it..

[Milla]

Laker: having difficulty saving 20% down does not necessarily mean that one lives beyond his means. people seem to be forgetting that while house prices are falling, the cost of everything else is rising, including rents. think of student loans for four years of college, plus the cost of an advanced degree, which helps up one's earning power. food costs, gas, heathcare -- all up. oftentimes the money that's supposed to be stashed away ends up going to meet basic living expenses.

[Long time listener . . .]

Once again, the point of my email to Pete was to refute the arguments made by many on here (I'm looking in your direction Puckhead) that when prices come down to what seem reasonable, 500k?, they will be snatched up. The payments on a 360k mortgage is still a $3500/month payment in total costs. Not a whole lot of households will be able to swing more than that without significant income, most likely above 150k with very little other debt. So even if houses get to 500k, there won't be that many people who can qualify, and if they are first time home buyers, maybe than can get FHA help, maybe not. And if they already own, they have to get out of their own house to move up, and that will prove very tough. There was a reason houses cost what they did in 1999 and 2000, because that's what income levels could support.

[jjs]

fha is not freddie and fannie...fha loan limits are at that $362k figure. different entities entirely with different purpose and loan amounts. fannie and freddie buy conforming and jumbo conforming loan amounts.

[Fred]

Westside Renter - re: your question about what is a normal price for a home in Westwood or Cheviot Hills. Go to zillow.com, type in the address of a house in that area. Look at the details of that property. At the the bottom of the page, you'll see detailed sales/price history. Click on it, and it will show you a linear graph of price information for that zip code and that house. Look to see what the price was in 2001. That's your "normal" price based on price-to-income and price-to-rent ratios in the area. That will be the bottom of the market.

[Laker]

Milla,
Where does it say that every person is entitled to buy a house?
Why do we (government/tax payers) need to sponsor home ownership? Why don't you sponsor gas? Why don't the government sponsor cars?
The government does sponsor home as in shelter in various programs like rent controls and section 8 and others. People can rent.
If you remove all subsidies and sponsorships, prices will align with incomes. That will promote education and production as people will know that once they improve their ability to earn more money, they will get more.
Why is it so hard to understand? If your costs are to great move out of this expensive city/state to another place where the cost of living is lower. That is how true free economy works, and that is the reason the US of A was the best place to live in but this "best" is diminishing very fast...for reasons such as yours and others.

[shockg]

Laker said: Thanks oc not 4 me. I just post what i see and i don't make money in RE (no investment properties) so I have no agenda.

Hmm, Aren't you trying to short the market with the sale of your primary residence? Don't you operate a one-sided bubble blog with cherry picked listings? Don't you encourage homewowners to "walk away" so the market will be flooded with even more foreclosures in hopes of lining your pockets? Yeah, no agenda here.

[puckhead]

LTL,

I never said that once housing prices fall to a certain level, like $500K, that houses would be snapped up. Some neighborhoods they will and some they’ll just keep falling It all depends on location, location, location. Median prices in most of LA and SFV are already below $500K and will continual to fall. I’ve lived in SoCal most of my adult life and it’s deteriorated so much it’s sad. My dad use to own a business in North Hollywood and I remember spending time there in the summers and walking around the neighborhoods and skating at the Valley Plaza. Perfectly good place to live and raise a family. I drive by there now and I can’t recognize it. Anyone with a choice would not raise a family there. Dozens of neighborhoods have gone through the same transformation. The pockets of family friendly, safe neighborhoods with decent schools are shrinking and people like you with good incomes are all looking at the same places. That’s why I think places like these will hold up better. That’s not to say that I don’t think prices even in these neighborhoods will go down because clearly they have. But whatever the pain is that’s being felt in the IE, it’s going to be less than in say Arcadia, South Paz, South Bay etc.

As for your situation, like many have already said, save up your money so you can put more down. Don’t be in a hurry cause prices are not going up anytime soon. Don’t spend a lot on rent, it’s just money thrown away. Pay off your student loan, $900/month is a killer. And when you do buy, there’s actually lots of kid friendly, safe neighborhoods that have good schools that’ll get you much more house than LA. Depending where your job is, look at places like La Crescenta, Cypress, Simi, Irvine, Walnut, parts of Fullerton, Valencia. Look on the bright side, you are in your late 20’s and you make good money. You’re entering your prime earning years and you should see some nice jumps in pay. Whatever mortgage you get will be much more manageable as your income goes up. If that doesn’t work, tell you wife to get a job. Good luck to you.

[Melissa]

Wow, LTL may make a lot of money but he really can't crunch mortgage numbers. A $360k loan is well under $3k/month - my mortgage is close to that and my payments are $2400/mo. Let's run some numbers, lets say the $360k loan was with a 20% downpayment (note the monthly payment would be lower if this were a 100% LTV since prop taxes would be lower). So the home price was $450k, that means the monthly prop taxes are $470/month (1.25% per annum for LA County), lets say $180/month for insurance, so the TI portion is $650 per month. Now for the PI, my lender (local credit union) is currently 6% for a 30 year fixed conforming loan with no points, so the mortgage payment is $2150/mo. Add it all up and you get $2800/month, not $3500. Also, I have friends who bought in the OC for exactly $450k and yes their payment is exactly $2800.

[d]

how the hell do you make 200k+ and not have a minimum of 50k in the bank. between myself and my wife, we've already amassed ~40k in just one year with a combined income between 150k-200k and we live in NYC! and we have a baby!

[Uncle Bill Climbs Mont Pelerin]

Tanta? I haven't seen you on here before, though I have seen your laland refs on blogspot. If this is your first time posting here, then welcome to the blog! You are the perfect antidote to drudge-0-mania that has been sweeping through with increasing frequency.

[Cal]

Westside Renter: "Cal, many of us here respect your opinion. What do you think?"

First, thanks for the compliment. Second, I don't know. :-) I'm unfamiliar with the area, I will see if I can pull some stats this weekend.

But I would say that I don't see how people could go wrong renting this year, things are just starting to get going in earnest for the mid to upper end. At the lower end the REO market is bringing things back to normal much faster. So we have the low end dropping away and the mid to high end just kind of doing a Wile E Coyote "Yipes" as they are looking down at the canyon below them. Something has to fill that gap and it isn't the low end homes moving upward.

[Jbo]

I am also 29, married, with 1 kid, and I make $52k/yr (wife is studying). I have $11k down (plus what I can get granted - $10k) and can't find a home in an acceptable area for under $400k (acceptable is my wife needs to be comfortable walking around). They are getting closer though. Just...a...little...bit...further, and we'll be in!

Please keep dropping. They have to keep dropping, or my wife will insist we move. I love LA. too much (born and raised). Even despite all the over-crowding. If they would only put in that damn monorail system already.

May the housing gods show mercy on me.

[shockg]

jbo said; "I love LA. too much (born and raised). "

and so do millions of other people who happen to have vast wealth. That's why we always have and always will pay a preumium to live here.

[Milla]

Laker: don't miss the point. i'm not talking about the government giving out free houses to everyone. i'm talking about the differences that exist today vs. the good old days that everyone is so fond of romanticizing when your grandpa's salary alone could afford a house in his midtwenties with 20% down and have mom stay at home raising kids. we moved away from that to having two-earner households with 20% and maybe some kids later on. where do you think we're headed next? definitely not backwards.

[Nick]

To Westside Renter:

I live in that same area, and although I'm very hesitant to predict the bottom in dollar amounts, I am keeping an eye on that particular market also. At the risk of throwing out a WAG (wild *** guess), I'd guess prices will get below $300 per sq ft, even in nice-ish areas on the west side, which would put your 3/2 <2000 sq ft at under 600k. I would not be surprised if prices fell even lower than that in a free market, but it's more likely (imho) that we'll get a democrat president and a massive speculator/lender bailout (which will artificially stabilize prices) before prices correct as much as they should.

Just my opinion. :)

[nelcisco]

shockg.... it does takes vast wealth to live in LA, (so it seems) and to suggest that millions of people have vast wealth is off the mark. if they did we wouldn't be reading these articals about how messed up things are.

2 to 3% of Americans have vast wealth they don't all live in LA

[Westside Renter]

Fred, Cal & Nick,

Thanks for the response. I want to believe prices will fall back to 2001 levels (which in these westside neighborhoods would mean between $500K to $700K), but I know the big price declines happen when you have a lot of foreclosures. When I check the foreclosures for those zips, there are between 20 and 40 each in some stage of foreclosure, but the majority are condos. That's why I'm wondering if prices will really fall in these areas as much as we all think they should. Trust me, I want to believe :) But after watching them spiral upwards for years and now only seeing them inch down maybe 10%, I'm starting to wonder if things ever really will return to normal.

[save your ammo]

"But after watching (prices) spiral upwards for years and now only seeing them inch down
maybe 10%, I'm starting to wonder if things ever really will return to normal."
Posted by: Westside Renter | May 23, 2008 at 03:41 PM

7 years up / 7 years down. What do you want after a year? 10% is a good start.
Just wait until the Option ARMs start to reset. The "pick-a-pay" wreckoning day is upon us.

Keep watching the sky. It's falling!

[sfvrealestate]

Cal is an expert? On what basis?

[shockg]

Fred, Cal & Nick,

Thanks for the response. I want to believe prices will fall back to 2001 levels (which in these westside neighborhoods would mean between $500K to $700K), but I know the big price declines happen when you have a lot of foreclosures. When I check the foreclosures for those zips, there are between 20 and 40 each in some stage of foreclosure, but the majority are condos. That's why I'm wondering if prices will really fall in these areas as much as we all think they should. Trust me, I want to believe :) But after watching them spiral upwards for years and now only seeing them inch down maybe 10%, I'm starting to wonder if things ever really will return to normal.

Posted by: Westside Renter | May 23, 2008 at 03:41 PM

Westside, We are 3 years into the downturn and if prices havent fallen much in these neighborhoods by now that probably means they arent going to. Don't get caught up with what many who have an agenda are trying to sell: FEAR.

[Geek Seek]

Here's a graph showing seasonally adjusted personal savings rate since the late 50's:

http://research.stlouisfed.org/fred2/series/PSAVERT

Don't know what it was like right after WWII, but I can imagine that there was a culture of saving especially after all the shortages. This means that VA/FHA loans doesn't tell the whole story. In general, we were a nation of savers up until the 80's and 90's, and then kerplooie (we had a spike in savings in the early 80's when prime rate hit 20% and then it's basically all downhill after that).

[Uncle Bill Climbs Mont Pelerin]

SFV: He produces good data time and time again, understands the data, explains the data, calls bs on other bad data, and gets better all the time. Puts him pretty close to the expert category. You don't have to sit on the stoop with him at the blog party, but you should appreciate his quest for reality in this very mucked up economy of ours.

[Laker]

shockg asks and i shell answer:
Q: Aren't you trying to short the market with the sale of your primary residence?
A: No. I had to sell for other reasons. Insane prices was one of them.
Q: Don't you operate a one-sided bubble blog with cherry picked listings?
A: No. No cherry picking. Every second house i find can be posted on my blog. I just don't have the time to...
Q: Don't you encourage homewowners to "walk away" so the market will be flooded with even more foreclosures in hopes of lining your pockets?
A: NO. I'm telling them to think and do what is best for them. Is it better to pay $4000 rent money from the bank and see the house losing $4000 every month....or rent from landlord and pay $2000 for same house..seeing your future house get closer to you by the week...Yeah, no agenda here !!!!
Shockg, you are so full of it. In fact even the NAR today sounds more credible! You are a joke.

[Laker]

sfvrealestate ,
CAL is sure an expert based on his honesty, integrity, no agenda, bring great pieces of info, comment on news items, and great logic and common sense.
Somethings that others like you ....here lack.
I would actually buy a house from CAL....

[Cal]

sfvrealestate : "Cal is an expert? On what basis?"

None whatsoever.

[Joseph]

Ditto what Laker said: Cal is the sanest voice on this blog, as well as one of the most insightful.

[shockg]

Thanks Laker, I rest my case.

[wobbly]

Shockg said that we are three years into the downturn. He went on to say that if the west side hadn't dropped more than 10% by now it won't drop more.

I wonder if anyone here can pinpoint the start of the downturn. Somehow it seems to me that prices were still going up in 06 a date that would not leave the downturn at three years old.

By the way shockg sounds like Rush to me. Rush is the guy who amongst all his lies pushes the view that others have an agenda and that it's "fear". Interesting.

[Uncle Billy]

Wobbly: Maybe shockg has had his own private or local recession going on for 3 years? Shockg, where are you located generally? Wobbly, weren't you just a little wobbly before? Now you're wobbly period?

There are definitely people who push fear as he points out, some for their own benefit, and some out of their own fear. Let's understand it and use it. Don't worry about rush limbaugh -- he'll get nuttier and nuttier over the next few years and less and less influential. Discourse like this prevents personalities like that from doing too much damage, I think.

As for the topic at hand, it might be a good thing overall to have a certain balance between the owners and the renters, but we have yet to hit upon the way to do it. Free markets won't do it as, because unfettered, the owners would buy up all the property and squeeze everyone into pottersville hell.

[seabuscuit]

I'm also a West Side renter. I live in Venice in a house 1 blk from the beach and pay only $2,000 since I've been here 10 years. I only make $90,000 per year and I have just over 100 K to put down.

I feel like I'm missing the equity boat and the tax breaks buying offers and I'm sick of renting. I want to buy West Side but know I can't possibly do beach. So I've been looking in West Chester.

I just got "re" qualified after a couple months and now I'm qualified for no more than $500,000. Which frankly I wonder if I can even afford. But they will do 10% down since my credit is very good.

I'm actually considering moving right next to the airport just to get into a house. Planes overhead and all.
Sigh. But you can get a real house with a real yard for $550 there.

Can't believe I went to college, went to grad school, got a good job, and saved like a good girl and here I am.... unable to afford a house like a lot of us in Los Angeles.