the realities of the real estate market

I’ve lived in my apartment for 4 1/2 years now and recently, things have started to get a little more crowded (filed under girlfriend, cross-referenced with dog).  Actually, there are many apartments in my building with a larger occupancy than mine (including the upstairs neighbors – 2 adults & 2 kids) so it’s not all that bad – at all.

But, being Americans, it’s in our nature to covet more.

I decided to just see what our options are, and to contact my real estate agent who helped me with my current place and I was really shocked by the change in the landscape.

Now, I know all about what’s been going on in the world for the last year, so it’s not that this comes out of the blue.  What I didn’t appreciate was how much it changed the whole dynamics of home buying.  See, when I bought my apartment, I was able to do so with a very sketchy loan scenario in many ways:

  • I was qualified for way more than what I ended up paying for my place.  Ultimately I decided on what I thought was a much more reasonable price point than what my lenders were willing to give me.
  • I put only 5% of the purchase price down; using a home equity loan to cover another 15% (thus avoiding the need to pay any mortgage insurance)
  • I got a 7-year ARM loan (opting again for a more conservative route: I was originally offered a 1, 3 or 5 year fixed time frame but I decided I wanted a little more security)
  • I got an interest-only loan, meaning that during those 7 fixed years, I would only have to pay the accruing interest on the loan, and not any principal.

In many ways I played it much safer than what was being offered – I took the 7 year ARM, I bought a cheaper place, and importantly, I’ve always made larger payments than called for, refusing to pay only the interest portion of my loan.

So while I figured things would have tightened up in the past couple of years, I underestimated by just how much.

Talking to my real estate agent (and followed up by my mortgage broker) the scenario today is much more straightforward: put 20% down.  Anything less requires mortgage insurance.

Wow.  That’s a lot of up-front payment, especially here in San Francisco.

I was expecting the disappearance of the interest-only loans.  I was expecting tighter standards of credit worthiness.  I was expecting more realistic alignment of loan amount to income.  Each of these I was prepared for.

What I wasn’t expecting was a big hunk of cash being needed.

I see where this makes sense: this puts a LOT more risk into the hands of the borrowers.  If my apartment were worth 500,000 (it’s not), that would mean that when I bought, I would have had to put out 25,000 as a down payment.  If I default on my loan and walk, I’m out 25000.  With 20% down, that number changes to 100,000 – something I’d be a lot less likely to walk away from (and if I did, I’d feel a much worse sting).  Also, if the bank were forced to sell that property at a loss, there’s a much smaller risk that they’d lose significant value – since they’d be able to sell it at 80% of its value without losing a cent (since I would have already lost the first 20% of value).

This makes total sense from an industry that’s reeling from too much risk exposure.  But it’s really tough for folks like me who hadn’t really thought about the need to save up a 20% down payment.  It also really hurts sellers (or potential sellers) who won’t benefit from the same number of potential buyers.  No wonder we’re just not seeing that many for sales these days.

So, a little furniture rearranging, maybe a little paint here and there, and my apartment should be good for a little while longer.