From No Money Down to 20% (Why Real Estate Has a Long Way to Go)

Every week it seems that there are new numbers and new predictions about where the housing market will go. There is no shortage of opinions however there is also no consensus. I am of the opinion that the market has a long way to go down, and my opinion comes from this insider's perspective: we reached new heights on the backs of no money down loans and now the market is transforming itself into loans with a requirement of a minimum of 20%.

At the height of the housing boom, the poster child for the loan of excess was the 620 stated, stated, 100% loan. What this means was that someone with a 620 credit score, could state, but not prove, their income, state what they had in the bank, and they could all this and still buy a property with ABSOLUTELY NO MONEY DOWN. This was the most extreme loan but of course it also became the most popular loan among wholesale lending for months. When the real estate market produced record numbers of home owners, it did it mostly on the back of loans that were bought with no money down. Now, the market will be driven by borrowers that have at least 20% to put down. As such, in my opinion, there is still a long way to go down.

The market was setting records mostly on the backs of new borrowers that bought homes with loans newly created to allow folks with marginal credit to buy with no money down. It wasn't merely happening in Sub Prime. It happened in the Alt A market. Eventually, when their market share was diminished, Fannie Mae and Freddie Mac began offering more and more loans with little or no money down. In other words, the entire market, top to bottom, was driven by borrowers buying property with no money down.

Of course, all of that has changed. Sub prime is nearly non existent and its remnants require a minimum of 10% down. Alt A is also nearly non existent and its remnants also require a minimum of 10% down. Both Fannie and Freddie have cut their minimum back, but the real problem is two fold. First, the market used to split up any loans above 80% in two. Of course, second mortgages have had such a high degree of default as well that they are also nearly non existent. Further adding to the problem is that Mortgage Insurance Companies (companies that insure loans for banks on any loan over 80%) have significantly restricted their own standards. It is now virtually impossible to get a loan above 80% because MI companies are making it nearly impossible to do so. FHA still allows loans with as little as 3% down but FHA was never meant to be used on such a wide scale.

In other words, we have a market that zoomed up at outrageously brisk paces by bringing in new borrowers with loans where nothing was required to be put down. Now, that same market will soon require 20% down minimum as a standard. The market went up like this for almost four years. Furthermore, the new market for loans is signficantly more conservative than it was before the boom. All of this means that we have a long way down in real estate from here. Whatever market drops we have had so far, based on this data, we have a long way to go from here. I am talking another 30-50% potentially in value from here.