FHA insured loans filled a giant void from the private mortgage market exiting the game by brute force as the housing bubble burst. One thing is certain when it comes to consumer psychology especially with such an emotional decision like buying a home. People have wine expectations but come with beer budgets and this is especially true in housing. Becoming accustomed to low down payment mortgages, the bust in housing was a hard retreat for many Americans. In the 1970s and 1980s nothing down or close to it was left to the late night infomercials for those too inebriated to sleep before midnight. Most people knew this was a tiny pipedream. It was only until the 2000s that this became a common pathway to owning a home. FHA insured loans with a 3.5 percent down payment are now viewed as the subprime of current loans. Even recent potential home seller surveys confirm this perception.
What if I told you that you could have a $600,000 mortgage for a monthly payment of $1,700? Sounds like a great deal right? Of course the only way to get this kind of action is by going into the “exotic†mortgage options that everyone once thought were put to rest. I was going through some of my mail and noticed a surge in the last year of offers for creative mortgages and credit card offers. The volume is close to what it was in 2005 and 2006. I’m thinking that the difference this time is that the insane offers are now only going to those with decent credit as opposed to every person in the virtual phonebook. One flyer caught my attention regarding interest only mortgages. Interest only? I thought these were done. So I decided to run a scenario for an $800,000 home purchase with $200,000 down (25 percent). What I found was interesting and also highlights how some people are assuming a big down payment is somehow the immunity from risky moves.
However you want to slice it, median or repeat same home sale prices the price of a home in California went into the stratosphere over the last year. The psychology has now shifted to full fledge mania where people think they are going to be priced out but some are oblivious to the reality that they are competing with a massive amount of investors. The median home price of a SoCal home in March of 2012 was $280,000. For March of 2013 it jumped to $345,500. What justifies such a big move? The only true justification is the artificially low interest rates being provided by the Fed, low inventory, and investors (the trifecta of the current market) but this pace is completely unsustainable and you will see this trending out towards the end of the year. Why? Because there is no way you are going to have 20+ percent annual gains on the median price and the media is running with this feeding into the frenzy. A stunning 34 percent of all SoCal purchases in March came from all cash buyers. How much momentum does this trend have?
The median price for a home is a useful measure in more stable markets. However, this current market is anything but stable especially for California. That is why according to the California Association of Realtors, the median price for a home in California went up 28.2 percent in one year. Even DataQuick has the year over year jump above 20 percent. This jump in the median price is on par to what we saw during the high powered early 2000s. Yet the current jump is coming more from the shift in the homes being sold. Fewer foreclosures are being sold and thus the mix is made up of higher priced properties overall. Foreclosures in general sell for much less than non-distressed homes. Yet the median price for a home gets quoted in the press and causes a self-fulfilling prophecy similar to when home prices start moving down. It is worth looking at this data since it is telling.
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