A little-known fact about the MMM household is that Mrs. M. actually holds a real estate license. She got this a few years ago as a way to help us both explore our shared interest in houses (buying, selling, renting), and as a way to help a few customers to find homes in our area as well.
But one interesting thing about having this license is that you also get regular propaganda from the trade group called the National Association of Realtors (NAR). Now, I’m all for groups of like-minded people sticking together to support each other. But I am NOT for the extreme case of this, where groups try to change public policy in a way that benefits them, but actually hurts the country as a whole. For example, oil-related companies strategically hiring fake scientists and republican congressmen to inject doubt into the public debate about Global Warming. And pretending that they are actually trying to help us all, rather than just ensure a continued flow of regulation-free oil profits. Industry groups with motivations like that need to fuck off.
What I’ve found, after reading a few years of the internal messages from the NAR to its members, is that they seem rather slanted towards only increasing the profits of Realtors, and being a bit selective about the evidence they latch onto. They did things like pushing for higher and higher tax credits for first time and repeat homebuyers, and they’re always pushing for lower and lower standards for mortgage eligibility, because having everyone buy a house at the highest possible price is in their best interests.
So recently I got to read this funny email from them:
Call for Action: 20% Down Payments Put the American Dream Out of Reach
Could your clients afford a 20% down payment? Could you? Can you envision what your prospective client pool will look like if new regulations governing Qualified Residential Mortgages (QRM) take effect this year?
Neither can we. And neither can many elected officials in Congress who did not intend for these regulatory provisions to be so narrowly defined. We must continue our efforts to explain how detrimental the new QRM rules would be to the ongoing housing and lending crisis in America.
According to NAR Research, 60% of recent home buyers made less than a 20% down payment, and it would take 14 years for a typical person to save up a 20% down payment to buy a median-priced home.
Could my clients afford a 20% downpayment? Well, after a year or so Mustachian Boot Camp they certainly could.
Could I afford one? Umm, Yeah. True, it took me until almost age 25 to get there, but that’s because my first house was $235,000 at the time, I bought it as a single person, and I wasted the first few years after graduation driving an unnecessarily expensive car.
“It would take 14 years for a typical person to save up a 20% downpayment for a median-priced home“. Wow, very interesting. Let’s assume these typical people are luxury-oriented and they are ready to jump straight to a single-family home for their first purchase as I did, bypassing any sort of condo or townhouse starter home. The median price of these is $170,000. So the downpayment is $34,000. How much do you have to save over a 14-year period, to end up with $34k? Let’s assume only a 4% return on your savings, since you just want a reliable bond fund that won’t fluctuate in value when you need it for the downpayment.
The desperately non-Mustachioed savers in the NAR’s example were socking away only $150 per month towards their first home!
Now I don’t want to be too elitist here, but I do have to insist that someone who can only save $150 per month is NOT READY TO BUY A HOUSE YET! A person with this level of discipline is probably going to buy couches and dishwashers on the installment plan too, and perhaps even, gasp, borrow money for a car.
Imagine what would happen to such a person if he lost his job! He would instantly feel a sharp monetary pinch. If enough people had this situation simultaneously, we’d have to invent some sort of National Insurance system to ensure that they continued to get a stream of money even when they were unemployed. We could call it “Unemployment Insurance”. What a funny idea.
And imagine if the precariously financed homes of these ultraborrowers ever fell in value? They would instantly owe more on the house than it was worth. If this happened with simultaneous job loss, some would not even be able to make their mortgage payments, and the banks would have to take back the homes. Others would deliberately walk away from their mortgage obligations, deciding that it’s better to break their promise of repayment than to honor it and lose money. It could become a vicious cycle, with falling home values causing even more defaults, and we’d have a national housing price crash.
Yeah, now that we think through that hypothetical situation, maybe we SHOULD ask people to put 20% down. Partly as an incentive to keep their homes through a downturn, and partly just as a test to see if you’ve read enough Mr. Money Mustache articles to be disciplined enough for home ownership.
The US Federal Minimum Wage is $7.25 per hour right now. $1200 per month if you never do any overtime. Still over $1000 after payroll taxes. Even if you’re in the worst case, single and want to own your very own house and split the cost with nobody, you save your downpayment by sharing a house with roommates for $350/month, and buy your groceries, food and clothing for $250. You’re saving $400 per month and you’ll have your 20% downpayment in less than 7 years.
And it is damned hard to make minimum wage in this country. I pay people $15 per hour to paint walls or dig fence post holes for me occasionally, and I feel guilty for ripping them off with such an embarrassingly low wage. Independent house cleaners charge $25 to $40 per hour.
So, no, I don’t think it’s unreasonable to suggest that people rake together a 20% downpayment for their first house, just as I don’t think it’s reasonable for anyone to borrow money for a car of any price. If the minimum wage earner can do it, you can do it too with your fancypants high salary. You just have to get a bit more badass about it.
Excellent article MMM. I fully agree that 20% down should be a requirement. When shenanigans are allowed to reduce that limit, problems nearly always arise.
However, your thinking on the $15-$25/hour folks is a little skewed. Remember that most of these folks can not work a full 40 hours a week because so much time is wasted between jobs, traveling to and from jobs, and trying to find jobs. My hourly rates are over 5 x that amount, but I only get that when I’m turning the figurative wrench. All the in-between, sole prop. time is “wasted” and has to be calculated in.