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%.