Why arguing for tighter lending standards means a higher down payment.
Is it time to bite the bullet and change our lifestyles? Are we learning that less is more? Will people once again start valuing a home more than a fancy car, a luxury vacation and more stuff? This is a very informative blog on where we have been and where we may be going again.
In all the debates about down payments that have been on Activerain and other sites lately, it's interesting that a lot of agents argue two points consistently: they're not in favor of increased down payments but they are in favor of lower debt-to-income (DTI) ratios. When you think about those statements, you're left with only a few options that I don't think many agents are clearly understanding. If you increase the DTI there are only three ways that can happen:
- Reduce the price of the property
- Increase income
- Increase the down payment
Now, most agents would agree that falling prices is not what they want in any given market. So, if lenders or the government pass laws to tighten lending standards that result in a lower DTI, that means buyers will able able to afford less mortgage and thus lower priced homes. Unless! Duh, duh, duh...they put more money down. Now, if you're still in the "more money down isn't the answer" crowd, let's consider the alternatives.
Buyers can increase their household income. In most households, the ability to increase income may exist but generally at the expense of some other facet of life. Time is time and you can't get more of it. If one or more people in the household is working longer hours to increase income, that means less time for family, friends, etc. I'd love to hear the options about how a two-income household is supposed to increase their take-home pay. Also remember, reducing expenses is only part of the solution. You have to increase actual income.
Lastly, there's the one thing many agents refuse to consider because it could hurt a lot of markets. That's adding more money down. It's simple math, if you reduce the DTI you have to increase the down payment. if not, buyers will spend less and prices will fall.
Agents and NAR claim it's hard for a family earning $50,000 a year to put away another $10,000 as part of a down payment. That's not the whole story. Tighter lending standards and thus a lower DTI mean less money to spend on houses. How much of a borrowers DTI is tied to general consumer debt - money spent on useless gadgets, electronics, trips, etc? Quite a bit as it turns out.
As a consumer driven society, there's an expectation of spending. How much discretionary spending is on things that could be shifted toward the down payment. I'm talking about not buying a LCD TV, not taking a vacation, taking better care of "things" so they last longer, and generally not wasting money on "stuff" when the home is a bigger priority.
The bottom line is that we're asking the American home buyer to make a decision about where they put their money - homes or stuff. We're the only country in the world that "wants it all" and is unwilling to make sacrifices to get it. If we tighten lending standards, the only way to not see prices drop is to increase the down payment. The only way to do that is to reduce discretionary spending on unnecessary extras. Borrowers will be much better off, have more money to put down, and be able to manage their cash flow better.
Bryan Robertson, Broker AssociateRealtor, Developer, e-ProDRE# 01191946
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