The incredible, disappearing home down payment

axios com

2 mins read

Many real estate markets across the U.S. are in the midst of an affordability crisis because of rising home prices, tight access to credit, and a homebuilding industry that has been slow to build new homes. That's made it hard for renting millennials — the oldest of whom are well into the prime homebuyers years of their mid-thirties – to afford down payments. 70% of them in a recent survey by real estate data company Zillow say that saving a down payment is the single biggest factor preventing them from buying,

Why this matters: Entrepreneurs across the country are recognizing the opportunity to profit from a broken real-estate finance industry that is failing to serve many prospective homebuyers. startups like Unison and Loftium are looking to profit by investing money upfront with real-estate shoppers.

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Homeownership has been becoming more expensive for decades — the median price of a new home in 1974 cost 1.7 times the median income, today that figure is at 2.6. This trend, however, was papered over by the explosion of easy mortgage lending that began nearly twenty years ago and culminated in the bursting of the real estate bubble in 2006.

Since that time, homeownership rates have been depressed, and those who do buy homes are increasingly relying on mortgages insured by the Federal Housing Administration (FHA), which allow homebuyers to put as little as 3.5% down. This arrangement can be more costly for homeowners, however, because it requires them to pay monthly mortgage insurance fees, and potentially puts the taxpayer at risk if the FHA miscalculates its risks — the agency required a $1.3 billion bailout in 2013 for this reason.

Two approaches

James Riccitelli, CEO of Unison Home Ownership Investors, says in an interview with Axios that he is consistently surprised that nobody in the decades-long history of U.S. housing finance had thought of the company's business model. Unison co-invests with prospective homebuyers—typically putting 10% down along with a bidder's own 10%, helping them qualify for a standard 20%-down home loan. Depending on the lender Unison partners with, a homebuyer can end up putting as little as 5%:

� Unison's investors—who Riccitelli says are typically large pension funds with long investment time horizons—realize a profit only when the home is sold. The product is attractive to such investors because they need assets that match their liabilities, i.e. pension payments sometimes 30 or 40 years away.

� Other than a few private equity funds that bought up cheap single family homes at the housing market's bottom between 2010-2012, there are few ways for investors to own a diversified pool of residential real estate, a market that at � $30 trillion is more valuable than the U.S. stock market

� A homeowner can buy Unison out at any point after three years—as long it recoups its original investment. A homeowner can sell the home to another party at any point, however, even if it results in Unison taking a loss.

Loftium has an alternative strategy. It will will contribute $50,000 for a down payment, as long as the owner will continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium.

� This strategy might be particularly appealing in booming markets like Seattle, where rent prices are rising even faster than home values themselves, and which are popular tourist destinations.

The bottom line: There is no replacement for good public policy, like expanding the affordable housing tax credit, or rationalizing zoning restrictions in a way that allows homebuilding to meet rising demand. But these business innovations are an important step too, as both startups will enable homeowners to take on less debt, all else equal.

� Less debt makes government regulators happy, who are keen to expand homeownership without also encouraging reckless lending standards and ballooning debt that led to the last crisis.

Creative, and potentially profitable for these down-payment companies. However, it leaves questions unanswered that were important during the last bubble. Strategic default, for example. My guess is if these companies are successful, they will ride the wave up for several years, maybe a decade or more, just like the subprime lending industry rode 1997 thru 2006. Then when it crashes, the companies will request bailouts so the pensioners don't suffer. I applaud them for trying new ideas, but the bottom line is you're putting people into houses who don't have much money and everything depends on rising home values and/or AirBnB business models working out to make up the difference.

"Everything depends on rising home values..." Exactly. And we all know that doesn't always happen. At least, it doesn't always coincide with when someone might need to sell for whatever reason.

Since 2013, nationally Millennials are 34% of home buyers and 66% of first time buyers.

Student loans is the largest deterrent for loan approvals so at the end of July Fannie and Freddie raised the allowable DTI to 50% from 43% to help millennials buy homes. They've also changed their model to lessen the impact of student loans vs. CC and auto debt.

Currently, FHA holds 27.5% of all mortgages. Expect to see that number increase dramatically with the higher DTI.

The statistics regarding debt shows that, even without student loans, Millennials carry more debt as a percentage of income that Gen x and Baby Boomers.

Ironically, I like so many real estate brokers, the overall reaction is highly negative. It is hard to fathom that just 5 years removed from one of the worst housing markets in US history that they would even consider increasing risk.

Personally, I hate the idea of removing the traditional down payment of 20%, which has stood the test of time to produce motivated homebuyers who will hold on to their houses if the market dips. WIth no skin in the game, not only does the chances for default rise, but more importantly , this lack of sacrifice results in a bubble of housing asset values.

Real life Indiana:

My title agent says she has not closed a loan under $150K (high starter home here) in YEARS where the buyer paid the downpayment. 3-3.5% paid by the SELLER is NORMAL. Closing costs are rolled into the loan or paid by the seller.

So "saving" for a downpayment is not necessary.

Even still only 24% of local loan apps are approved.