Down Payments' Downward Trend

By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, January 21, 2006

More than four out of every 10 recent first-time home buyers financed their purchases with no-down-payment loans, according to a study released by the National Association of Realtors this week.

That's an increase of about 54 percent over the past two years. Analysts say the upsurge means more buyers have entered the market who have a greater risk of defaulting on their mortgages.

"That is a very big increase. It's almost certainly due to the fact that you have a lot of people feeling very stretched," said economist Dean Baker of the Center for Economic and Policy Research. They can't afford traditional mortgages, "prices are going through the roof and this is how they're responding."

The findings come at a time when the booming real estate market is showing increasing signs of slowing. More than a few sellers in the Washington region have reduced asking prices, and buyers are taking their time looking at a rising number of homes on the market.

Because those who apply for zero-down loans often have little or no savings, analysts say they are more likely to let mortgage payments lapse. In a worst-case scenario, such borrowers might be forced to sell, potentially flooding the market with homes and driving down values, which would affect all owners in an area.

"The increased ease of mortgage lending is propping up the market," said Susan Wachter, a real estate economist at the University of Pennsylvania's Wharton School, adding, "Everyone's exposed."

The survey covered people who bought and sold homes from August 2004 through July 2005. The association said 43 percent of first-time buyers surveyed financed 100 percent of their homes, up from 28 percent two years ago when the trade group began tracking such figures. Less than two in 10 repeat home buyers had no-down-payment loans. The median down payment -- the point at which half of the down payments were smaller and half larger -- for first-time buyers was just 2 percent. For all buyers, it was 13 percent, lower than the traditional 20 percent down payment.

Keith Gumbinger, vice president of HSH Associates, a real estate research firm in New Jersey, warned against reading too much into the numbers. "The fact is that the number all by itself doesn't necessarily describe the motivation of the people underneath it," he said. Investors or speculators are likely to put no money down with the expectation that they could resell the properties at a much higher value quickly, Gumbinger said, and others who could have afforded to put money down might have chosen not to because they didn't want to draw down their other assets.

Particularly in high-cost areas such as the Washington region, nontraditional loans present an opportunity for first-time buyers to own, with the community benefiting from the trickle-down effects of high homeownership, said Paul Bishop, the real estate trade group's research manager.

The figures were part of the group's annual report on home buyer and seller characteristics. The association mailed questionnaires to more than 90,000 people who bought homes during the period covered and received 7,813 usable responses.

One of the areas the survey explored was the for-sale-by-owner market. According to the report, such properties accounted for 13 percent of the market, down from 15 percent in 1995 and 20 percent in 1987.

Furthermore, the median sale price for homes sold through agents was $230,000, compared with $198,200 for those sold by owners. Thomas Stevens, the association's president, attributed the 16 percent difference to lack of understanding of the home-selling process among people who try to go it alone. Agents, he said, were able to maximize market exposure and generate multiple bids.

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