> 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.
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.