Thursday, August 26, 2010

What is the correct downpayment?

If required down-payments are too low, we get the nonsense of the past several years. I am reasonably sure zero is too low. If required down-payments are too high, we, among other things, perpetuate wealth disparities (i.e., the only people who get credit are those that don't need it). I am reasonably sure that 25 percent is too high.

What is both socially optimal and just? We need to try to figure this out, but it would involve knowing the correct social loss function and then minimizing it. Social welfare functions are very, very tricky businesses.


Morgan Price said...

Why is 25% too high -- is renting really so much worse than buying? What am I missing?

Ches said...

If a bank keeps a loan in their portfolio, they will be pretty astute in determining a proper down payment. If that loan is bundled into a CDS watch out before you buy. Is there a moral here?

devin said...

Morgan, I think historically, yes, renting has been much worse than buying. And large down payments essentially function to reinforce past economic injustices. (e.g. children of middle and upper-class parents frequently get help with these down payments from parents...minority groups--more frequently from low-income backgrounds don't receive such assistance and are at a serious disadvantage)

Of course, past performance is no guarantee of future results, so...maybe instituting much, much higher down payment requirement would be a good idea. Such a policy would likely have the affect of drastically reducing home prices even further, thus destroying much of the (paper) wealth that separates the middle class from poverty. That might be another way of going about removing the economic stratification in society, since the low-down-payment approach kind of blew up on us.

SPWS said...

Some people prefer to rent a home because they think that buying a home is lot more expensive than renting one. What do you think about this?

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