The
lending crisis has certainly been felt by many.
Investors have suffered through the kind of stock market volatility we haven’t seen for some time ...
Entire units have been shut down at some of our biggest, most “solid” financial companies ...
Realtors and mortgage brokers have been forced to actually do some work to earn their checks. Tragic.
But the real victim of the whole fiasco is my little sister.
My little sister, who is looking for her first home in Northern California.
Not too long ago (earlier this year, in fact), a first time homebuyer like my sister could have walked into any mortgage broker’s office, and walked out pre-approved for 100% financing for a $500,000 home loan.
(For those who aren’t familiar, 100% financing basically means that the traditional down payment is rolled into the amount financed – typically at a higher, variable rate – so people without a lot of cash could get into a house. Buyers for the past several years have generally felt pretty comfortable with the risks: i.e. home values would never come down ... right?)
Last week, my sister was told by three different mortgage brokers that they “no longer do 100% financing.”
Wow. Talk about a 180.
To put it in perspective, she does live in one of the most expensive real estate markets in the U.S. To come up with a 20% down payment on a palatial $130,000 home in Arkansas is a very different proposition than coming up with 20% of a $550,000 one-bedroom fixer-upper in Sonoma County, CA.
When you think about my sister’s situation, it’s not hard to imagine the ripple effects:
But There Is An Upside
This is going to sound sanctimonious, I know.
But the old-fashioned side of me is cheering my sister’s plight.
True, she’s not going to find it easy – or even possible – to buy a home any time soon (at least not in the Bay Area).
But at the same time, it might force her to reevaluate her finances. If she knows she’s going to need upwards of $60,000 in the bank in order to buy a home ... maybe she’ll start saving.
It’s a novel idea, I know, for our younger generation to grasp. But it is possible, dare I say prudent, to put money aside.
We all know that ours is a culture of “now.” When we want something, we expect to get it. We don’t want to wait, and we don’t want to sacrifice. Given a choice, who would?
So to all of you who got 100% financing a few years back, took out more to buy a boat, a couple of jet skis, a new car, and a brand new wing on your house: this is going to be a bitter pill to swallow.
But to all of you out there who hope to become first-time homeowners: while you might not be able to get what you want today, you ought to consider yourselves lucky. And if you save your money, bide your time while prices continue to fall, you’ll be in a great position when we come out on the other side of this cycle.
Investors have suffered through the kind of stock market volatility we haven’t seen for some time ...
Entire units have been shut down at some of our biggest, most “solid” financial companies ...
Realtors and mortgage brokers have been forced to actually do some work to earn their checks. Tragic.
But the real victim of the whole fiasco is my little sister.
My little sister, who is looking for her first home in Northern California.
Not too long ago (earlier this year, in fact), a first time homebuyer like my sister could have walked into any mortgage broker’s office, and walked out pre-approved for 100% financing for a $500,000 home loan.
(For those who aren’t familiar, 100% financing basically means that the traditional down payment is rolled into the amount financed – typically at a higher, variable rate – so people without a lot of cash could get into a house. Buyers for the past several years have generally felt pretty comfortable with the risks: i.e. home values would never come down ... right?)
Last week, my sister was told by three different mortgage brokers that they “no longer do 100% financing.”
Wow. Talk about a 180.
To put it in perspective, she does live in one of the most expensive real estate markets in the U.S. To come up with a 20% down payment on a palatial $130,000 home in Arkansas is a very different proposition than coming up with 20% of a $550,000 one-bedroom fixer-upper in Sonoma County, CA.
When you think about my sister’s situation, it’s not hard to imagine the ripple effects:
- People like myself, who need to sell their home in this market (not by choice, believe me), all of a sudden have seen their potential pool of buyers shrink. A lot. Taking first-time home buyers out of the equation does indeed screw up the demand curve.
- Demand for homes going down means that prices are sure to become even further depressed. People who “got while the getting was good” and were able to achieve 100% financing a few years ago are going to be stuck where they are for longer than they’d planned because they won’t want to take even a small loss on their home. That means their starter house suddenly turned into their ... well ... house. Period. All these potential buyers are off the market now, too.
But There Is An Upside
This is going to sound sanctimonious, I know.
But the old-fashioned side of me is cheering my sister’s plight.
True, she’s not going to find it easy – or even possible – to buy a home any time soon (at least not in the Bay Area).
But at the same time, it might force her to reevaluate her finances. If she knows she’s going to need upwards of $60,000 in the bank in order to buy a home ... maybe she’ll start saving.
It’s a novel idea, I know, for our younger generation to grasp. But it is possible, dare I say prudent, to put money aside.
We all know that ours is a culture of “now.” When we want something, we expect to get it. We don’t want to wait, and we don’t want to sacrifice. Given a choice, who would?
So to all of you who got 100% financing a few years back, took out more to buy a boat, a couple of jet skis, a new car, and a brand new wing on your house: this is going to be a bitter pill to swallow.
But to all of you out there who hope to become first-time homeowners: while you might not be able to get what you want today, you ought to consider yourselves lucky. And if you save your money, bide your time while prices continue to fall, you’ll be in a great position when we come out on the other side of this cycle.
3 votes
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Comments:
Brian
8/21/2008 4:20 PM
Risk based lending is merely reacting to the performance, or lack thereof, in previously originated mortgages. The optimism and greed in Real Estate have yielded to the logical lending practices of the late 1980's, namely full-doc, 80% LTV vanilla