More on Down Payments

Written by Jim the Realtor

August 22, 2009

From today’s U-T on the underwatered:

http://www3.signonsandiego.com/stories/2009/aug/22/8216underwater8217-households-resurfacing-it-depen/?business&zIndex=153576

In the meantime, many owners refinanced when interest rates hit historic lows earlier this year, and others with problem loans will increasingly work out solutions with their lenders, said David Cabot, who oversees Prudential California Realty offices throughout Southern California.

“Most people, if they still have a job — and 88 percent do — and can afford to make the payment .?.?. aren’t going to move” just because their home has lost value, he said.

Cabot added that if they do, countless investors are standing in the wings to pick up the heavily discounted properties.

“We have lists and lists of people that, if we could give them 100 short sales, they would buy them all with cash,” he said.

David and I go back to the 1980s when we worked in the same office, and we’re on friendly terms. But even if I didn’t know him, I’d back him up on his quote in bold, at least to his point of there being a lot of big money in play.

We’ve seen it all year that today’s buyers are using all-cash, or big down payments to fund their purchases.  Here is a summary of the down payment amounts used by the 73 buyers who bought a house in Carlsbad or Carmel Valley since August 1, 2009:

DP Amt. # of Buyers
0 (VA)
4
3-4%
9
4-19%
6
20%
13
25%
7
30-49%
18
50-80%
11
all-$$
5

Almost half of the buyers used a down payment of 30% or more, which I think most people would consider a well-capitalized purchase, and hopefully a sign of people planning to stay a while. If it continues, it would bring real stability to the market, once we get cleared out.

The all-cash buyers bought houses for $245,000, $525,000, $1.4, $1.75, and $2.3. There were nine FHA loans.

29 Comments

  1. Susie

    From the 8/19 OC Register: “42% of CA Loans Are Under Water”
    “California had the nation’s fifth-highest percentage of home loans that are higher than the value of the homes they’re financing.

    According to Santa Ana-based First American CoreLogic,: 42% of all loans were upside-down, or under water, as of June 30.

    That compares to Nevada, where two out of every three home loans were under water; Arizona and Florida, where about half were; and Michigan, where 48% households owe more than their homes are worth.”

    Full article: http://lansner.freedomblogging.com/2009/08/19/42-of-california-loans-under-water/33965/

  2. propertysearch

    This is great information. It answers the question everyones keeps asking…How can people afford to buy all of these houses when the median income and median house price don’t match up?

    Well 50% of buyers have a down payment of 30% or more. 30% OR MORE off the mortgage payment makes an affordable house payment.

  3. Mark in San Diego

    Something that has been “lost in the shuffle” of the economic downturn, is the fact that the largest transfer of wealth in the history of the US has and is taking place. . .namely, people like me at 61 who have inherited their parents house/bank accounts, businesses, etc. My parents died 5 years ago, and my partner’s parents died 10 years ago. . .many of my contemporaries also have inhertied their parents house, etc. People who are 55 or older have parents who are in the 78 to 90 age range, and “statistically” dead (average life expectancy is now 78). . .a woman I volunteer with just sold her month’s house in Santa Ana for 500K after reducing the price from 650K. . . her mother bought the place for 20K way back when. As she said, “I could afford to lower the price, it was all free and clear.”

    So folks. . .THAT is where a lot of money has come from. . .trust me. . .that is how I was able to buy cash.

  4. BGinRB

    ‘“We have lists and lists of people that, if we could give them 100 short sales, they would buy them all with cash,” he said.’

    And they would live in all 100 of them, I presume?

    And what happens when they turn around and try to sell those properties? Where do you find 100’s of first time home buyers employed and with stable outlook? Your only hope is to find a bigger fool.

  5. Rob Dawg

    I don’t doubt there are cash buyers but 100? That’s 100x $300k = $30 million. There isn’t $30m out there waiting for him to bring distressed real estate deals.

  6. Jim the Realtor

    I should note that David is the broker of record for Prudential California Realty, and manages 1,000s of agents throughout So Cal.

    When he speaks, it’s on behalf of his agents, he’s not out selling any more.

  7. sdnerd

    It’d be interesting to see the same breakdown, but with a price floor of something around $600,000.

    Throwing $200-300,000 down payment on those CV houses in your last few videos certainly makes them affordable based on the areas income.

    A $400-500,000 mortgage at today’s rates is probably going to be equal to or possibly less then renting in those locations.

  8. sdbri

    I went 20% down, could have gone 30%. This money didn’t come from nowhere – I’ve been planning to buy since 2002 but every year I added to my savings house prices grew and I was back at square one. By 2004 the bubble was obvious and as Warren Buffet says “If the price isn’t right, never buy.”

    Some people ask how Americans can afford a median house at median income. In California, most of them can’t and they shouldn’t.

    Some classic suggestions for staying out of trouble:
    Houses are for living in long-term, not speculation. I intend to own my home at least 50 years, so I only care if it’s affordable with a margin of safety, and compares well against rent.

    Never buy what the bank says you can afford, even with today’s standards. The bank said I could buy 30% more than I did. I could do that if a house was the most important thing in life and I didn’t mind being a prisoner. I’d rather live well in a good home than content in a giant trap. With that money, I can travel Europe and Asia twice a year, furnish my house with anything I like, and focus on pretty much everything besides my house.

  9. sdbri

    Anecdotally every all cash buyer I’ve known has bought for investment and plans to hold onto it forever. They see it the same way some people see buying stocks or bonds, only if they know what they’re doing this will pay far higher yields than the average bond and the principal has far greater protection than the average stock.

    Incidentally under value investing philosophy, when investing in stocks the correct horizon is to hold it forever. Compared to the initial investment, many of Buffet’s early stock are paying over 10,000% dividend a year. This is why longterm earnings growth trumps all other considerations such as timing and stats.

  10. The Blur

    “We have lists and lists of people that, if we could give them 100 short sales, they would buy them all with cash.”

    I wonder how many of these all cash buyers are investors who made their money in housing during the bubble. Maybe they’re one trick ponies and they assume there’s another bubble around the corner. Are they getting a good deal at 20% off peak?

    The NASDAQ looked good to a lot of people at 4,000.

  11. arizonadude

    Does anyone think we have another bubble brewing in stocks?People are chasing the market bigtime.

  12. sdbri

    To roughly quote Warren Buffet, “I have never met someone who could actually predict the market.” You can predict that people will be greedy and that they will be fearful, but not in which order.

    On the other hand, compare the stock rebound to the rebound after the First Great Depression:
    http://dshort.com/charts/bears/road-to-recovery-large.gif

    Whereas the dot-com crash rebounded and quickly formed a second bubble, and the Oil crisis crash rebounded and continued on a different longterm path.

  13. 3rd Generation

    Why Not a large cash downpayment? Greedspan-Ba Helicopter-Printing Press Ben and Little Timmy Geithner as well as Chairman Benito MaObama are wrecking the value of the dollar daily to Soon-to-be Zimbabwe or Weimar levels and attempting and failing miserably to prop up the bubble economies with more fiat printed valuless paper. Jeezus, no matter what the price at least with a houese you can sleep in it or have a whorehouse or process illegal alien felon invaders or cook crank, Something…

    With the aforementioned Wall Street Gangsters in charge soon the dollar will buy Nothing.

    CD rates <2%… Why Not a large Cash Down. Makes Perfect sense even if the elected leaders Do Not.

    America = Turd World Nation of Nothing.

  14. JimB

    These investors, even if they don’t know it, are actually placing a bet on California. That’s what you’re doing when placing hundreds of thousands on RE here.

    Not for me, but I could be swayed if evidence were there. All the evidence I have is contrary.

  15. Jim the Realtor

    All the evidence I have is contrary

    I lay out a fair amount of positive evidence, yet you are one of the guys who completely ignores it every time.

  16. BGinRB

    Sdbri, you forgot the most memorable Buffet’s quote, the one he uttered earlier this year – “You’ll make me whole or there will be no more contributions.”

    I’m sure peope who bought into the oracle don’t care about the fact that inflation adjusted BRK.A is down for the decade. The dividend BRK.A pays make it all ok.
    As well as the nice people who bought GM stock 60 years ago and decided to hold on to it forever.

  17. Myriad

    I’m sure there are people out there with money who can buy all cash. There are always people with money and plenty of investors too. Some amy even consider it to be a decent investment since the market has rallied 50% already, other investments have such a low yield, and the long term trend of the dollar is negative.

    But there are many more working families where $600k+ is a lot for house (20% down) and the fixed costs are significant. Given that in this economy, no one’s job is safe, the cost of in state college education will probably double in the next 10 years, and cost of state services/taxes will go up too, spending too much income on a house is probably not the wisest thing to do.

  18. 3clicks from da beach

    Move over Bacon here comes Sizzelean.

  19. tj and the bear

    I think it’s fantastic that people are out there putting 30% down; 20% should be the minimum on any mortgage, period.

    As it is, the people using FHA 3.5% down are immediately underwater (since selling and breaking even obviously takes over 6% equity) and have no incentive to stay put should their circumstances change for the worse.

  20. JimB

    I don’t doubt people are buying homes. That I believe.

  21. CA renter

    Anecdotally every all cash buyer I’ve known has bought for investment and plans to hold onto it forever. They see it the same way some people see buying stocks or bonds, only if they know what they’re doing this will pay far higher yields than the average bond and the principal has far greater protection than the average stock.

    Incidentally under value investing philosophy, when investing in stocks the correct horizon is to hold it forever. Compared to the initial investment, many of Buffet’s early stock are paying over 10,000% dividend a year. This is why longterm earnings growth trumps all other considerations such as timing and stats.

    sdbri | August 22nd, 2009 at 12:09 pm
    ——————–

    This is one of the most accurate statements, IMHO.

    From my personal experience…we are heavily invested in bonds/fixed income securities. I tried to lock in a number of CDs and bonds at over 5% back in 2007. So far, a significant number have been called (I split between callable and not, as yields are higher, and I’ve long suspected yields would rise much higher). Some brokerage CDs have been taken over by the FDIC, and though many of them retained the original rate, a few had the rates reduced when the govt closed the banks.

    In addition to these investments, we are trying to keep a fairly large percentage in liquid accounts because we really would like to buy at some point, and want easy and quick access to cash. We are earning ~.33% on much of it. (note that decimal before the 33)

    Because these artificially suppressed rates have been held so low for so long (most of this decade), we are forced to look into much riskier investments. We are looking at hard-money, and also at buying rentals in the hard-hit areas because we can earn MUCH better yields on a ~$200K house in O’side than we can on any equally risky investment out there.

    Again, if interest rates rise, these investors will likely flee the housing market, and many organic buyers will have to significantly reduce what they’re willing to pay for a house.

    These low interest rates are **absolutely killing** anyone with cash, so I expect housing and stocks will rise for as long as rates are kept at these levels.

  22. KeepIF

    Interestingly the cash buyers I have known took out a HELOC on their primary residence convinced that they can flip low priced foreclosures. The quote was, “Cause I am paying cash I am getting a discount and I can flip to a mortgage buyer”.

    I am still interested to see what happens to “investors” buying up all the houses in the nearly vacant exurbs in Temecula. I believe the cash flow will be disappointing to them.

  23. KeepIF

    There were also people lined up to buy pets.com and Las Vegas Sands (LVS), it is amazing how quickly things can change when new information becomes available.

  24. BGinRB

    CA renter, Ally (ex-GMAC) has 2% on savings accounts. It takes 10 minutes to set up an account and you can move your money in or out in a day or two.

    E-loan’s PLUS account was around 1.5% few days ago.

  25. sdbri

    BGinRB, comparing snapshots of a stock’s price tells you very little about the stock’s actual value or performance over that time period. BRK-A has almost never priced at its actual value above or below. Over the last 10 years, BRK-A has outperformed the rest of the stock market by 100%. Lastly the very nature of stock pricing is in its volatility, and the irrational prices Wall street assigns them relative to inflation is simply that.

    GM was a terrible stock for its entire existence, it is not nor has it ever been a value stock. There have been thousands of American car companies since the invention automobile, and of them every single one with one exception has gone to ZERO. With a true value stock, a longterm investor would make tens of thousands of percent return just from the dividends. Furthermore a stock is not a value stock unless it can survive liquidation (at liquidation valuation) with net equity, so an investor will never get nothing even if the company liquidated at the steepest discounts.

  26. sdbri

    After being bought by Chase, Wamu offered $100 to open a savings account with minimum $100 deposit for 1 month. I took them up on the offer and withdrew the $200 just in time to add to my down payment. Chase is offering a similar deal but with more restrictions now.

    2% savings is great, I find each bank runs promotions like these so you have to keep an eye out. Schwab did 2% checking for a while to draw customers, eventually phasing it out. Before I bought, I mostly put my money into intermediate tax exempt bonds at 2%. Luckily on top of dividends they’ve appreciated as well, don’t know how long that will last though.

  27. CA renter

    BGinRB,

    Thanks for the heads-up. 🙂 Yes, I saw that, too, but am trying to keep everything as consolidated as possible, so have been using brokered CDs and bonds, for the most part.

    However, with the pathetic yields we are getting it might be time to start moving money around again. This low yield environment is getting very, very old. 🙁

  28. Ronald McMansion

    Is all of the government manipulation (low interest rates, propping up banks, homebuyer credits, etc…) creating a floor or simply making the downward spiral more sticky!

    I was in Florida for about a year, while the bubble was about to peak. It was really something to witness. California has a good amount of industries that generate a lot of money, but Florida doesn’t have quite the same. If it weren’t for tourism and some wealthy retirees, the state would be more like Alabama or Mississippi.

    What I was witnessing was a number of baby boomers from the North who were just retired or getting ready to retire. These folks, for the most part, came from jobs that paid quite well, in the upper 10% probably. They liked what they saw and felt that all the other baby boomers would want it too. So, they began buying as much real estate as they could afford, expecting to cash in over the coming decade(s) as the baby boomers retired.

    Of course, the bubble was also fed by the average Floridian buying homes they couldn’t afford with some form of subprime loan and then refinancing or getting a heloc to pull out the equity that materialized during the frenzy.

    It was a perfect storm of easy money for buyers and builders, and I think it was initially driven by a minority with money. The problem was/is that not all baby boomers have enough money to buy a condo on the beach in Florida. Not to mention the fact that the easy money won’t be coming back.

    There seems to have been a great disconnect between those with money and those without. The ones without money actually felt that they had some when their homes shot up in value double digits annually, but now they’re back to reality, likely with more debt and/or less favorable credit than they had.

    So, while there are those with enough to buy a home with cash or a considerable downpayment, they don’t represent the majority of people out there. I just wonder if the same fools investing in Florida (and elsewhere) during the bubble are foolish enough to think that we will have a quick v-shaped recovery. Unfortunately, the way the stock market has reacted will only give them (false?) hope.

  29. arizonadude

    Did any of you give more money to angelo mozillo via the pennymac ipo, pmt?They raised over 300 million to buy bad mortgages they originated.Got to love america.

    I am going to bring an ipo to the market so I can raise some capital.I need a xmas bonus you know.My new company will be called howtoscrewyourbank.com. You guys are going to be my venture capitalists.

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