After a disastrous housing market crash exacerbated by artificially depressed pricing points for lower-income, first-time homeowners, you’d think the people in charge of crafting loan policy in the U.S. would have learned a thing or two about the realistic cost of entry into the housing market.
But this is the government. According to Bloomberg’s Megan McArdle, the lessons of the housing crisis of the early 2000s appear to be little more than a distant, fuzzy memory for regulators.
“We just spent six years learning, the very hard way, that you can’t borrow yourself rich,” she wrote last week. “That knowledge is too expensive to throw away so easily.”
At issue is the current push by progressive groups, lawmakers and some in the mortgage industry to lower down payments on homes for first-time buyers so that they can get in the door before having to worry about paying the lifetime cost of their loan.
“The government agencies that drive most of the housing market are pushing for lower down-payment standards on mortgages, easing the 20 percent requirement that has become standard for much of the market,” McArdle wrote. But, she warns, the large pool of buyers who take advantage of the low-threshold approach isn’t homogenously free of the risk of default. And they’re unlikely to see any growth in the value of their property unless the housing market swells throughout the life of their loan:
Is there a good public-policy reason to encourage people to make a heavily leveraged bet on continued upward movement in home prices? Presumably, the argument is that many homeowners have done very well out of this over the past 50 years; rising home values sowed the seeds of many a college education and retirement fund.
But there are huge drawbacks to housing, too. Leveraged bets are great when they pay off; when they don’t, they leave you dead broke. Especially a bet on a large, illiquid asset such as a house. Put a homeowner into one of these gambles at the age of 35, send the local housing and job markets south a few years later, and the end result is a broke middle-age person with trashed credit in desperate need of a good rental unit. Which legislators should know, because we seem to have a lot of them around right now.
So who, then, can buy a house and expect to reap some passive financial reward as the property increases in value? It’s certainly not people who can’t afford to make a significant down payment, she argues.
But buying a house is a good idea only if you meet the following conditions:
- You can afford a sizable down payment to cushion you from the effects of local economic downturns or you have a super-stable job, such as working for the government or your father-in-law, that makes you unlikely to ever miss any payments.
- You can afford the maintenance as well as the payments, insurance and property taxes.
- You have good disability and/or mortgage insurance to make sure that you do not miss any payments even if you break your back and can’t do your job anymore.
- You are pretty sure you do not want to leave your area or move to a larger, more expensive home anytime in the next five years.
- Your payment is a reasonable percentage of your take-home pay (I shoot for under 25 percent; anything over 35 percent is far too risky).
- You have a sizable emergency fund to deal with contingencies.
- You can afford other forms of savings, rather than counting on your house as a piggy bank for future needs. In general, if declining home prices would send you into a hysterical panic about your financial situation, you are buying too much house.
How many homeowners do you know who meet those sensible conditions? Yet buying a house without thinking through one’s total financial commitment, over a span of decades, is “gambling,” McArdle argues.
And it looks as though the government will continue to make it dangerously easy for first-time buyers to go gambling.