Compare housing prices since 1990 vs. wage growth over the same period. For the overwhelming majority of people entering the workforce today, there is no way to realistically save for a down payment unless you forego saving for anything else - no 401k, no IRA, no emergency fund, no car, no family.
Houses have gotten bigger and interest rates have fallen since then.
That said I agree with the sibling comments that 20% down payments shouldn't be as out of reach to as many people as they are. Housing prices are ridiculous.
a) Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over
b) Median Sales Price of Houses Sold for the United States
We see that the a/b ratio was 0.25 in 1980, and has declined to 0.05 today.
Therefore, a 20 % down payment in 1980 would equal to a 4 % down payment today. Conversely, a 20 % down payment on a house in 2023 (median wage, median house) is equal to a (25/5)*20 % = 100 % down payment in 1980!
The lender’s risk is therefore limited to the difference between purchase price and actual value of the property. Which is something they can hedge or simply not make a loan if they think the property is wildly overvalued.
Regulators are basically picking a number between 3.5% to 35% and 20% is a nice round number in the middle of that range.
The experience of the foreclosure crisis seems to differ. I know people who moved into houses where holes were punched into walls and everything was removed that could be, from door knobs to outdoor deck planks.
We’ve settled on a really arbitrary system where for example the Federal Housing Administration requires huge upfront FHA insurance payments without regard for down payment size if it’s less than 20%. If you’ve saved up say a 8% down payment you really should be a significantly lower risk than someone putting down 3.5%.
I suspect we’re looking at this through different temporal lenses. When I talk about regulation, I mean the last 100 years in its entirety, not just since the financial crisis of 2008. I agree with some of your point regarding how thresholds are set arbitrarily, though.
I am talking about lending before regulation. High down payments were not universally applied, so yes sometimes a loan might require 40% but other borrowers might offer nothing. My point is you can’t simply say the required amounts were excessively high some of the time because they weren’t universal and selected based on a perception of risk.
It’s not just regulation at play here, the government has decided to reduce bank’s risks while also subsidizing home loans. Net result is more home owners but also much longer mortgages. https://www.thetruthaboutmortgage.com/wp-content/uploads/201...
Which is precisely what PMI is for.
People buy cars all the time that cost a decent fraction of what a house does, and nobody bats an eye when they finance 100% (or more) of the value. And a car depreciates and moves. The bank knows where to find the collateral for a mortgage, and the value generally appreciates.
I used to write some lengthy posts about this and then a few months ago The Big Short was on TV, I watched it for the first time, and realised it was saying exactly what I'd been trying to explain for years. So just watch that.
Plus it has Margot Robbie explaining the technical terms in a bubble bath, so if you don't get it the first time, you can rewind and watch again.
Accountability on the part of the prospective owner can be achieved in multiple ways, but using down payments probably minimizes the amount of bureaucracy and following-up in how authorities manage this kind of thing.
Of course, implementing it this way creates "structural inequity", i.e., a process that inherently separates one group into two groups along lines that members of that group have little to no control over. Obviously the property not-having-money is correlated with other factors such as skin color and whether your parents went to college, which creates divisions along lines that are not just economic but socio-economic, and influence the development of not just that person but also everyone who depends on that person, including future generations.
I would be very interested to hear more from systems theorists on other kinds of methods that don't reproduce these kinds of correlated outcomes.
Hierarchies need hierarchy. Economic apartheid is one of the most common - and least questioned - ways to enforce hierarchy.
It's the usual problem of defining the difference between a progressive and a regressive economy. Regressive economies claim to be about "freedom" but in practice it's a very selective freedom that benefits a few small sectors and acts as a brake on innovation, development, and entrepreneurship for everyone else.
Consider all the businesses that could have been started by talented people currently spending all of their income on rent. It's a brittle, oppressive outcome.
Progressive economies rely on wealth redistribution to create something closer to a genuine meritocracy.
There's a whole PR industry devoted to denying this, but it's not a coincidence that the US was a powerhouse of innovation when redistributive taxes were at their highest. And has stagnated as economic apartheid has become more entrenched.
That's the crux of the political debates going on today. What kinds of values are represented by the status quo, and what kinds of values may replace a (retrospectively) naive approach to meritocracy.
> I had to pay PMI
... meaning that they did not have a substantial downpayment. Assuming they bought in Washington state, they probably also had a non-recourse mortgage.
Credit inflates the housing markets. Houses used to be bought outright without credit. Credit is top heavy, where a small number of parties can obtain enough credit to buy many houses while an increasing amount of people cannot obtain credit to buy a house to live in. The people who already own property benefit from increasing valuations, while people entering into the housing market bear the costs. It's gotten to the point to where people with 6 figure incomes cannot afford a house.
It seems like the instability of the housing prices is largely due to the volatility of credit markets. If housing was not emphasized as an appreciating asset class to be hoarded by speculators who want to grow rich from housing, then more people, who are now stuck in the rental trap, can live in their own home. The situation we have now is that non-speculators who want to own a home have to bear the risk of a credit inflated & volatile asset when all they want to do is own a house & not pay > 2x rental costs. Those who do successfully play the game now live with neighbors who also play the game, instead of a more diverse crowd of people they would rather be neighbors with. The banks created & profit from this mess & are bailed out. The non-speculating aspiring home owner pays the costs.
They are extremely unlikely to be able to save for even a downpayment on a property in two lifetimes combined.
It gets worse when you cannot inherit, which is a situation all too common these days.
Your decree does not invalidate the lived experiences of the people who want to own a home but can't afford the > $80k down payment, so they are stuck paying rent. The problem is credit inflates housing prices. Some parties, such as speculators, have plenty of credit, so they can buy multiple houses & inflate the markets using credit. Those who cannot obtain credit or are not willing to play the game are stuck trying to save up > $80k for the down payment on top of their regular living expenses that are under rapid inflation.
The middle class used to be able to buy a home or large acreage outright without credit.