Wednesday, December 09, 2009

When Gregg Easterbrook writes about something I know about, he almost always gets his facts wrong

In his football column (which I like), he writes:

A generation ago -- a decade ago! -- home buyers were expected to have a 20 percent down payment; that made them unlikely to try to buy something they could not afford, and banks wouldn't be exposed if something went wrong, since they were lending only 80 percent of the value of the property. Now requiring 3.5 percent down is viewed as "toughening" standards. Isn't this an invitation for yet another cycle of mortgage problems?


Low downpayments for FHA loans have been around for awhile. When President Eisenhower signed the 1957 housing bill, Time Magazine reported:

The Federal Housing Administration, aiming to attract money for homebuilding, increased maximum interest rates on FHA-backed mortgages from 5% to 5¼%. And to woo more buyers from middle—and even low —income groups, it slashed down-payment requirements from 5% on the first $9,000 to 3% on the first $10,000 of a mortgage.


Yes, one could buy a house for $10K in 1957. A brand new 3-bedroom in Mansfield Ohio cost $15k at the time, so used homes would have cost less.

Buyers have also been able to use private mortgage insurance to buy houses with five percent down-payments for many years (at least since the 1980s--if any one has history on PMI down-payments before that, I would love to hear about it). VA loans have always had very low downpayment requirements.

Do I worry about FHA? Sure. But let's not pretend that we lived in some virtuous world before this decade in which everyone put 20 percent down on their house. It was just not true.

3 comments:

Anonymous said...

$10,000 in 1957 is the CPI adj equivalent of $75,646.35 in 2008. A $75,000 home is quite affordable, and a 5% down payment loan will probably be repaid. Its that non safety zoning silliness that drove the cost up to $200,000 per home. The bottom half cannot work enough hours to repay a $200,000 loan, and never will be able to.

Let smaller, more affordable homes be built if you want the bottom half to be able to buy a home.

Rich Kedzior said...

Easterbrook should be damning the underwriting deficiencies, not FHA loans themselves.

I bought my first house in a so-so Washington, DC neighborhood (Columbia Heights) in 1998 with an FHA loan. I refinanced into a better mortgage in 2003. Considering the small downpayment (~$6000) and all of the capital gain since, it is probably the best investment I'll ever have in my entire life. It's now the cornerstone of my retirement savings.

If we want more housing affordable to working class folks, we need to convince local governments to allow smaller housing units to be built in their communities (or have state or regionally-mandated housing targets). Very few municipalities outside central cities are willing to do it due to social biases, property value fears, and fear of schools becoming overcrowded. It's an issue loaded with political landmines; so, few regions deal with it effectively, and thus there is a dearth of housing built specifically for working-class households in the US.

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