30 Percent Down Payment: The New Normal?

I've always been fond of news stories that are neither new nor particularly unknown, like when some local TV station runs a human-interest story on some local teen who organized a charity drive three months ago. They're cute!

And they're no less cute when the Wall Street Journal runs such stories, as it did recently, reporting that banks are requiring larger down payments to buy a home, as much as 30 percent of the purchase price.

Real estate and mortgage professionals everywhere read that and said, "Hey, welcome to the way things have been for the last three years, Wall Street Journal!"

I tease the Journal, but I do think the story is important -- not for the fact that private mortgages have been requiring higher down payments, but for some nuggets buried in the story. Taken together with some other recent items in the news, what we have here, ladies and gentlemen, is the New Normal for American housing.

And as you will see, perhaps what has happened in the past was in reaction to events -- like the foreclosure crisis. But what we will have in the future is by design.

Chicken Little Nuggets

One such nugget is the Obama administration's proposal to raise down payments. But of course, the actual proposal to reform housing finance goes far beyond just that. The proposal more or less advocates eliminating Fannie Mae and Freddie Mac, getting the government out of the business of financing home mortgages, and sets forth what I've been talking about for a while now: a programmatic shift away from Homeownership Society to Renter Nation.

The Journal goes on to report, "A 2009 Federal Reserve Bank of St. Louis study concluded buyers who made smaller down payments were more likely to default during 'unfavorable economic circumstances, such as a housing market slowdown or job loss.'"

What is left unsaid is that the new emphasis on larger down payments (i.e., more equity in the property) is being driven by the fear of strategic defaults -- walking away from the house even when you can make the payments. As home values continue to plummet, banks are realizing that even a great credit score doesn't mean the homeowner is going to keep paying for a $600K mortgage on a property now worth $300K. The rational thing to do is to walk away...unless you have significant equity in the house.

Then we are told something that industry professionals knew for quite some time: The federal government is now directly insuring half of all mortgages in 2010:

FHA-backed mortgages, which require 3.5% up front, made up about half of loans for home purchases last year, according to housing-research firm Zelman & Associates.

Which means that if those borrowers default, you and I the taxpayers are directly on the hook for the full amount of the mortgages -- that's what mortgage insurance means, after all. If you think that the new Republican Congress is excited to continue funding these expenditures, you haven't been paying much attention to what's been going on in Washington D.C.

Finally, we have this little nugget:

"Many people will turn to the multifamily market," he said. "Or if you don't have whatever is deemed to be the appropriate down payment, the alternative is to be a renter while you accumulate that. You can't put a formula down that is going to fit every borrower's profile."

What's interesting about that quote is the source. The "he" in the story is John Courson, the President and CEO of the Mortgage Bankers Association. I believe that we have yet to see the other shoe drop in the Federal housing policy: government support for rentals, via financing of multifamiliy projects.

Adding It Up: The New Normal = Renter Nation

So when I add up all of the pieces, what I get to is the unavoidable conclusion that we are seeing the New Normal being born. The past few decades of what we Americans considered the norm -- owning your own home as quickly as possible -- appear to be in the rear view mirror.

Setting the real estate industry aside for a moment, it may be that this is in fact what is best for the nation as a whole. Perhaps all of the subsidies of housing in pursuit of Homeownership Society were misguided and led to a irrational financial system. Maybe over the long haul, these are very necessary reforms.

However, in the meantime, as consumers, as buyers and sellers of real estate, the New Normal does mean that while the value of housing will drop (a simple matter of supply and demand), it will become harder and harder to become a homeowner. If you do not currently own, you will find yourself renting for longer while you build up the downpayments. Sheila Bair, Chair of the FDIC, is quoted as supporting a minium 20 percent down payment on mortgages. The key word is minimum. At the Future of Housing Finance conference, PIMCO's Bill Gross said if his money were going into funding mortgages, he'd want 30 percent down payments. Prior to the New Deal in the 1940s, 50 percent down payments were not uncommon.

Now, it's true that none of these government policy issues have been resolved. We don't yet know exactly what will happen over the next several months. Having said that, bankers and financiers did not become wealthy bankers and financiers because they sat around waiting for the other shoe to drop. They have been taking action already in anticipation of these moves, and I expect that they will immediately adjust their lending practices as soon as the temperature in DC becomes readable.

So, welcome to the New Normal. Say hello to Renter Nation, everybody. We're going to be here for a while now.

For more on mortgages and related topics see these AOL Real Estate guides:

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