>just means every first time buyer can now pay 15% more (approximately) for a house
Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house? That's a shift in the structure of the market rather than just a change being "priced in" for the same set of buyers.
>In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.
I would think this is the kind of question where we need data. I like to think I respect the exercise of thought experimenting more than your average person, but in this case, it seems to illustrate how thought experiments serve to answer questions by restating their core assumptions rather than exposing them to challenges in the way data would.
> Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house?
No. Real property doesn't work that way at all.
The effect of most of this kind of government intervention in the housing market is to subsidise developers.
In fact it's so bad that in the UK shareholders of such a developer are outraged because the uncapped bonus structure for executives at the developer means they get enormous (many times annual salary) bonuses essentially directly funded by central government which the shareholders of course think instead ought to all be profits assignable as dividends, not "bonus payments" for executives whose "performance" amounts to just sitting back and collecting free money from central government.
Like there's not even doubt there about what this government money does, it goes to the house builders, it can't and doesn't magically produce more homes, the argument is about who gets to keep the loot.
Government can intervene to actually build homes, and that would actually work, but NIMBYs hate it, so if a government doesn't actually care about housing people then a policy that can be headlined as support for home buyers but actually just puts money in the pockets of the wealthy is a good choice.
I carefully read through the rest of the comment after this sentence, waiting for the support for this claim, and feel as though I came away emptyhanded. I get that the shareholders anecdote is supposed to support it, but that came off as really fuzzy and unclear, and not something that directly engaged with my question. Are you saying there are no new buyers? Do you have any article that talks in more detail about the systematic relationship between shareholder expectation of dividends and their relationship to the switch from 20% to 5%? Or some elaboration on how the debate between shareholders vs executives relates systematically to the change in requirement for down payments in a way that clearly describes how it absorbs most of the gov funds?
I gotta lay my cards on the table, here. I feel like if any of this were true, I would have received a really simple, one sentence reply of "sure, here's a link!" that links to an article deep in comprehensive macroeconomic data, and not a weird meandering anecdote about developers carried not by any evidence, but mostly by the gravitas of emphatic personal assurance that just declares that "this is how it really works".
The rest of the comment isn't support for the claim that real property isn't like this - instead it assumes you've been shaken awake by the realisation that oh, these aren't toasters or smartphones, they're homes, and thus real property, and so the usual free market hand waving doesn't apply at all.
But if it wasn't clear I'll explain. The reason real property isn't like this ought to be entirely obvious at a very high level, the planet's surface area is independent of economic forces. If we've got twice as much money for smartphones, we can buy twice as many smartphones. But if we've got twice as much money for buying land in Ohio, there is still only the same amount of Ohio, and so the price just goes up.
You know, I actually thought you knew what you were talking about and were going to have something thoughtful to say. To answer directly: nope, this does not help at all. I was expecting something like a discussion of, I don't know, pertinent micro or macroeconomic forces, maybe something about elasticity as applied to housing, or citation of some article illustrating how a change in financing in one region had a measurable impact on prices and the number of buyers, or something of that nature.
Instead you are condescendingly lecturing me about the shape of the earth, and telling me the rest of it is so obvious you can't bother explaining it. But even I know we haven't run up against absolute geographical limits, and to to the extent that the shape of the earth is an influence, it one among many, in a process that is also mediated by additional influences, as well: constraints of availability of housing already built, the rate of new construction, changes in financing, population growth, people's savings, changes in how many people choose to stay at home, etc. I was waiting for some economically literate discussion of those kinds of elements.
That's correct. Developers sell homes. The FHA loan uses government money to allow people who buy homes to pay more money for the same home, this money goes to the developers.
It's definitely an interesting question. Increasing the pool of people able to buy a house increases demand, so that probably has some impact on the price.
Another factor is that people tend to think in terms of monthly payments, rather than overall price and interest rate. For example, I'm paying $1,500 in rent while saving $500/month for a mortgage. If the requirement for a down payment is removed, I may then think it makes more sense pay $2000/month for a house now with a low down payment than to keep trying to save a down payment while prices keep increasing.
FWIW, this is exactly what happened (with different numbers) when I bought my first house.
> prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house?
hence the measures are popular and very visible. Long term however (just as with subsidies and scolarships for education) all lead to pushing prices up.
Perhaps the buyers in the market could pay 10% but now that they only have to pay 5% the remaining 5% slowly (say over a few years) gets factored into the purchase price so that the down payment is the same as it were for 10%.
> Perhaps the buyers in the market could pay 10% but now that they only have to pay 5% the remaining 5% slowly (say over a few years) gets factored into the purchase price so that the down payment is the same as it were for 10%.
Are you proposing that the effect is to nearly double house prices in a few years?
If today’s price is $500K and buyers could pay $50K down, in a few years, that place would need to be $1M for the 5% down payment to be the same figure.
I believe op is saying that a person could “afford” a $500k house at $100k down at 20% would happily instead put $25k down (or $28.75k, to keep numbers accurate at a 5% down) on a $575k house.
Just because you can afford a down payment doesn’t mean you can afford the mortgage. I could probably cobble together 5% of a $1M house for a down payment but I could not afford payments on that mortgage. But if I could magically put 75% down, I probably could make the payments on the remaining $250k mortgage.
What I'm not sure I understand correctly is the second half of OP's content [how the change in downpayment requirement causes prices to rise such that a 5% downpayment is now the same as the prior 10% downpayment].
If you consider that the $500k house in the example is the same house that goes for $575k, then housing prices just increased to absorb the eager buyer at a lower percent down. And when the neighbor goes to sell, they see a similar house as their own sold for a higher price, so they try to sell for a higher price.
Right, at first. But do this over a few years and the housing market continues to expand and grow. The housing prices continue to go up and the required down payment continues to proportionally rise back to the point of market pressure pushing back. I don't think that half a down payment equals double the house cost (even in the long term), but it is just one more example of supply and demand. If you lower the upfront or monthly costs for something, then demand should go up which will push prices back up. Econ 101.
> If you lower the upfront or monthly costs for something, then demand should go up which will push prices back up.
Guh... I don't feel like I'm the expert here, but even on this little quest of mine to get a straight answer I feel like I'm finding one obvious conflation after another after another, as is the case here. Why would we assume that increase in demand pushes prices back up? It might, instead, reveal that lower prices are more optimal because they bring in more new buyers and more revenue overall. It may be that lower prices result in a larger total pool of buyers willing to spend a larger total amount of dollars at the lower price, which turns out to be a more optimal price, which is also econ 101.
It's better to sell big macs for $3.99 to billions of people than to than to sell them for $9.99 to millions of people.
Using a naive supply/demand optimization, that's true. But housing is a hyper-local market, and you have to apply that at a local level instead of a macro level.
Areas with more supply than demand already have easy access to home ownership. If someone's goal is just to "own a home", then they can already get one for 0% down by moving to a rural area[1] or an impoverished metro[2]. Even with no capital requirements at all, these areas struggle to attract interested buyers.
Areas with more demand than supply are already building as much additional supply as feasible within the the localized constraints (which could be geographical/physical, or could be governmental/zoning). Decreasing upfront capital requirements from 20% to 5% increases the size of the demand pool, but the supply was constrained even before those new entrants. So the increased competition will just result in pricing appreciation, as the existing demand can use that 15% spread in additional capital they have to out-compete the new entrants to the market. While some constraints are artificial (such as zoning) and could be removed to increase the available supply, those empowered to do this are the existing residents of the area who are enriched by this price appreciation. So they're perversely incentivized to reinforce this imbalance in supply/demand, rather than to take action to correct it.
There are likely some localized markets with more supply than demand (or the ability to increase supply in the face of increased demand). And these would react as you expect, with lower pricing available to maximize that demand. But this situation is transient in nature, as the more developed an area becomes the more likely they'll run into natural supply constraints (or have artificial ones introduced). So it'll eventually lead to one of the above situations: they have too much supply and have to essentially beg people to move there, or too little supply and pricing appreciates in response to the new demand.
Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house? That's a shift in the structure of the market rather than just a change being "priced in" for the same set of buyers.
>In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.
I would think this is the kind of question where we need data. I like to think I respect the exercise of thought experimenting more than your average person, but in this case, it seems to illustrate how thought experiments serve to answer questions by restating their core assumptions rather than exposing them to challenges in the way data would.