Backdoor Price Increase

Perhaps the key issue in housing at the moment — besides the just-released March Case-Shiller numbers showing that housing nationally touched a new low — is the initiative by lenders and some in Congress to mandate 20% down payments.

In theory, the proposal makes a lot of sense:  Buyers who put down 20% have real equity to protect — and therefore a strong incentive to stay current on their payments.

For lenders, 20% down represents a margin of safety that can mean the difference between a performing asset (what a loan is on a bank’s books) and a potential foreclosure and huge write-off (read, loss).

Theory vs. Practice

So, what’s the catch?

Just this:  there aren’t a whole lot of Buyers out there who have 20% to put down at the moment.

That includes many move-up Buyers, who’ve seen the value of their homes slide, and now have little or even negative equity (called “being underwater”).

And it also includes many first-time Buyers, who haven’t had time to accumulate any significant savings — and may still be saddled with sizable student loans.

Credible projections I’m aware of estimate that, if 20% down payments became standard, the hit to housing prices could be anywhere from 5% to 15%.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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