« Brownsville Affordable Project Gets State Funding Walkabout with Montrose: Faces I Remember »

September 15, 2009

New Rules for First-time Home Buyers

The New York Times this weekend joined throngs of other analysts and media outlets in pointing out that there are multiple culprits to the financial collapse that is now a year old—and that we, in addition to bankers and brokers or lax government officials, are partly to blame. People had fallen into the habit of stretching their finances to buy as much house as possible for their first-time buy, the Times says, and the paper offers seven new rules of buying to replace this and other unreliable maxims of real estate. It begins with the basics—put 20 percent down, get a fixed-rate mortgage, and don't spend more than 35 percent of your pretax income on your mortgage, property tax, and home insurance—and continues with more detailed advice such as mapping out your expenses and forecasting your future income. It's more than we can reproduce here, but the full article is worth a read.
Seven New Rules for the First-Time Home Buyer [NY Times]
Photo by triada53

Trackback Pings

TrackBack URL for this entry:
http://www.brownstoner.com/mte/mt-tb.cgi/11398

Comments

quote:
"don't spend more than 35 percent of your pretax income on your mortgage, property tax, and home insurance"

that seems wildly unrealistic, no?

*rob*

Posted by: Butterfly at September 15, 2009 10:24 AM

Rob, 35% of your pretax would work out to more like half of your post-tax so it's about right.

The one I take issue with though is the 20% down - not sure how many first time buyers could front $100k (for a $500k apartment) without help.

Posted by: the chicken at September 15, 2009 10:30 AM

I bought with 10% down. (although another 10% was loan from my mother).
And I think less down than that is ok too if strict in other areas....steady employment, debt ratio, non-speculative, fair and true appraisal. Many programs where they do less down have very good results (low foreclosure rates).

Posted by: Petebklyn at September 15, 2009 10:40 AM

"The one I take issue with though is the 20% down - not sure how many first time buyers could front $100k (for a $500k apartment) without help."

Awesome, salaries are stagnant - rents are still outrageously inflated and someone has to somehow save 100k for a 'starter apartment'

Sometimes this city really pisses me off.

Posted by: dirty_hipster at September 15, 2009 10:42 AM

"The one I take issue with though is the 20% down - not sure how many first time buyers could front $100k (for a $500k apartment) without help."

and thats why we've got a long way to go

Posted by: cornerbodega at September 15, 2009 10:44 AM

how are those rules new? those are the old rules, and everyone broke them. if you can't put 20% down you should not buy. end of story. If we want to prevent masses of underwater mortages in the future, we need to make it law. right now we're experiencing the social cost of over-leveraged housing. It's not about you and what you can afford, it's about everyone else when you fail to pay.

after the great depression we made it illegal to leverage a personal stock portfolio more than 2:1, to avoid the global impact of masses of investors facing margin calls (going "underwater") at the same time. But you can still legally leverage your house infinitely. does that make sense?

right now enforcing a legal minimum downpayment would cripple the housing market too much, but in the future it's what we need to do, when the market has recovered enough to absorb the impact of higher financing restrictions. we can't expect people to just "wise up".

Posted by: joe_the_bummer at September 15, 2009 10:48 AM

I agree with Pete that you can buy safely and responsibly with 10% in the right circumstances. My "starter" apt was a one bedroom in a co-op. The board allowed 10% down and the apt price was only 220K so even with 10% down the monthly payments were within the safe zone of percentage of monthly income. A first time buyer buying a smallish apt in Kensington or Ditmas or even Clinton Hill could still do a similar thing.

Posted by: wasder at September 15, 2009 10:51 AM

quote:
Awesome, salaries are stagnant - rents are still outrageously inflated and someone has to somehow save 100k for a 'starter apartment'

i thought you got the memo? the only people who can buy starter apartments these days are people with rich parents! but nyc has always been a city of renters so there's no real shame in renting. and i should probably stop railing against parents who help their kids. i probably could have bought something today had i lived within my means for the last 10 years, but i didn't, so i should probably just whining haha.

*rob*

Posted by: Butterfly at September 15, 2009 10:52 AM

"Awesome, salaries are stagnant - rents are still outrageously inflated and someone has to somehow save 100k for a 'starter apartment'"

If the price of that 'starter apartment' drops from 500k to 250k, then you only have to save 50k.

If 20% down is too much for the market, then the price is too high. 10% down, 5% down, 0% down were all gimmicks to avoid lowering the PRICE. Just like 1 month free, 2 month free, etc. are gimmicks to avoid lowering rental prices.

That's the core of the real estate problem.

20% down not only keeps prices down and weeds out the people who can't really afford the property, it also weeds out the people who don't have the discipline to save money (and who are much bigger credit risks long term even if they've never yet run into payment problems)

Posted by: northsloperenter at September 15, 2009 10:59 AM

The down payment percentage should not be the focus. It's the actual amount of debt one is incurring that is key. Up to just over a $300,000 loan at 6.5% you are still paying under $2000 a month in mortgage costs. It doesn't make any difference to your ability to make that mortgage payment whether you put down twenty percent or zero.

Come to Midwood if you're looking for apartments under $300,000.

Posted by: Peter18 at September 15, 2009 11:01 AM

saying 10% is ok under certain circumstances is funny stuff. Safe zone? Lol, if your financials are good enough in the first place then you would be able to come up with the 20% down.

Posted by: cornerbodega at September 15, 2009 11:02 AM

there are tons of places well under $500K.

btw - i always put 20% down or more - current place is 30% . work and save your money!

Posted by: wine lover at September 15, 2009 11:02 AM

OK, so what's wrong with my picture? We have $145K CASH in the bank (by scrimping and saving over 10 years) yet still can't manage to find our Brooklyn starter home (which for us must include room for 3 kids). It's the monthlies that will get us...two more kids to get into public school and maybe we'll have a chance.

Posted by: CHMomma at September 15, 2009 11:06 AM

for many people it's impossible to save money in nyc. youre nickle and dimed out the wazoo. the funny thing is i dont even know anyone in my circle of friends who has ANY savings whatsoever, and im talking people in late 20s early 30s. it's kind of sad, but for many people a reality. a scary reality.

*rob*

Posted by: Butterfly at September 15, 2009 11:07 AM

I would bet even generation and 2 ago...most houses were not bought with 20% down. 10% closer to it.
Don't forget FHA, veterans, etc, etc, etc. Fixed rate yes.
Strict guidelines, and none of that repackaging scheme.

Posted by: Petebklyn at September 15, 2009 11:10 AM

Hypothetical question:

Two identical properties. The first one was bought for $500k with $100k down. The second one was bought by a savvier buyer for $400k with no money down.

Is the first apartment a "safer" risk for the bank because the first buyer has skin in the game?

Posted by: the chicken at September 15, 2009 11:13 AM

Rob, maybe they are just telling you that they have no savings so they don't get hit up for a loan? ;)

Posted by: the chicken at September 15, 2009 11:14 AM

Part of the problem is we've become a society of 'have to have'.
When I first started thinking of buying a mortgage broker told me he could get me approved for $100000 more than what I realistically knew I could comfortably afford. I had the brains and financial background to know not to bite, but I'm sure many would have seen granite countertops and stainless steel appliances dancing in their heads and took the bait.
It's a dual blame - banking for offering unsustainable deals - and an ignorant public that took those deals.

We really need to start teaching finance 101 in middle school because we're raising generations of people who have no concept of fiscal responsibility.

Posted by: Flatbushrising at September 15, 2009 11:14 AM

quote:
We really need to start teaching finance 101 in middle school because we're raising generations of people who have no concept of fiscal responsibility.

i SO agree with that statement.

*rob*

Posted by: Butterfly at September 15, 2009 11:25 AM

Chicken,

A bank or a co-op board might not want to deal with someone who doesn't have a stake in the property, but the down payment percentage is not indicative of what's a responsible economic decision for an individual buyer.

Posted by: Peter18 at September 15, 2009 11:25 AM

flatbush: you can't teach common sense in schools.

chmomma: for 150 down you can afford 750K - I don't understand the problem. try Midwood, which has a great high school. Bay Ridge? There are TONS of options. Or what's wrong with forest hills? who needs brooklyn. NYC IS affordable. you guys are all too focused on park slope and places like that.

rob: you and your friends probably have jobs in enjoyable, creative fields. there is a price for that.

peter18: 20% down goes a long way to preventing underwaterness at the Macro level. agreed the personal affordability picture is more about payments.

Lastly, the US is UNIQUE in its culture of homeownership. Why do we all feel that we're supposed to own homes? I pay 2000/month to rent a place that would require a 4000 payment if I owned it. And now that it's not "guaranteed" to be worth more in 10 years, I'm not sure why I would ever buy it. why lock yourself down? why do we do this?

Posted by: joe_the_bummer at September 15, 2009 11:27 AM

I hate to say this because it's a bitter pill but it's about sacrificing for the end goal. I worked harder, saved harder and waited longer to get what I wanted.

I set up a separate bank account to which money got automatically deposited in each paycheck. I lived in much cheaper apartments in not as cool neighborhoods. I didn't go berserkers to have the latest coolest anything. If I came into any extra money (tax returns etc.) it went straight into the "house fund". I never carried any debt. I adds up.

Even in doing everything 'right' it took me until my mid thirties to be able to (combined with my husband who had also been saving the same way before we ever met) get that 20% down for our dream which was a historical row house. We also had to come to terms with the fact that it wasn't going to happen for us in Park Slope or even Brooklyn for that matter. We had to hop to Jersey City to make it affordable enough to happen.

It's possible but you have to sacrifice a lot and be realistic about what you can HONESTLY afford.

Flatbushrising- I couldn't agree more with everything you said @ 11:14.

Joe: Why do we do it? So that one day we can stop paying rent (mortgage payments) and just have to contend with taxes and maintenance. I don't want to be paying rent when I'm in my 70's. If I break even in the end when/if I sell it, it was worth it.

Posted by: TownhouseLady at September 15, 2009 11:34 AM

So we're all agreed? Prices need to halve!!!!!

Posted by: the chicken at September 15, 2009 11:35 AM

"The down payment percentage should not be the focus. It's the actual amount of debt one is incurring that is key."

Ding Ding Ding. Succinct statement award. Starter apts don't have to cost 500G and don't if you have some flexibility as to which neighborhoods you will consider. 10% down is a fine amount if the end result is that your monthly mortgage payment is within a reasonable boundary for your income level.

Posted by: wasder at September 15, 2009 11:44 AM

"We have $145K CASH in the bank (by scrimping and saving over 10 years) yet still can't manage to find our Brooklyn starter home (which for us must include room for 3 kids)."

Must be the neighborhoods you are considering...

Posted by: wasder at September 15, 2009 11:47 AM

Chicken - yes. Once the value of the property dips below $400,000, both mortgages are underwater, but data would probably show that the person who is already down $100k is more likely to try to keep it going, all else being equal.

Posted by: Brokedeveloper at September 15, 2009 11:49 AM

THL that's a good reason. but holy cow have you seen the maintenance they're asking at some of these coops? I feel like if I buy one of those, someone's going to own me anyway.

Posted by: joe_the_bummer at September 15, 2009 11:49 AM

Joe: That is so true! Even though we wanted a house we did look at some coops. Some (very few) were reasonable but others! I was choking at some of the maintenance fees. I thought if it's our house we can decide what needs to be done when. Replace roof one year, replace windows another. It's according to our schedule.

Posted by: TownhouseLady at September 15, 2009 11:56 AM

CHMomma - its not going to happen unless you go further out. You're probably caught in the middle between the affordable housing qualifiers and the rich enough to buy a three bedroom place group. They upside is the public schools further out are generally better.

Posted by: dittoburg at September 15, 2009 11:58 AM

I'm Brooklyn born and raised and really don't want to leave, particularly since my parents are still here and we want to be close. We live in a brownstone neighborhood (nope, not Park Slope) but only because I've been here since 1992 with the same landlord who understands the value of good tenants over market rate rents.

While our cash might equate to a 750K mortgage, it would not be realistic to depleat ourselves of our savings for the down payment. Plus, we'd have nothing left for any work we'd like to do (or to finally replace any of the Ikea furniture that stocks our place now!). Also, as I mentioned, the monthly payment for that kind of mortgage is not possible for us. Like I said, the down payment is not a problem, it's the monthlies.

We've been looking in Bay Ridge, Kensington and similar areas but find the inventory still pretty low of choices in public school zones that we are comfortable with and are still commutable for our jobs. Our eyes remain open and hope the new season brings more options....

Posted by: CHMomma at September 15, 2009 12:07 PM

Good luck. I feel your pain with the public school choices vs. a reasonable commute.

Posted by: dittoburg at September 15, 2009 12:16 PM

I question the whole basis of this article. I never heard anything about how you should stretch financially to afford your first place. What I have heard is that it might not be smart to get a place that's too small, since your family might expand.

Posted by: mopar at September 15, 2009 12:16 PM

Why is everyone focusing on the down payment? Your focus should be on your monthly payment as a percentage of after-tax (take home) income, and liquidity after closing CHMomma may have $150K saved up for down payment, but she still shouldnt be carrying housing payments (mortgage, tax, insurance) that is more than 30-35% of AFTER-TAX income - and most lenders and coop boards require at least 24 months of payments saved up. That $750,000 house with 20% down ($600K mortgage) will run you net over $3500 a month, which requires AFTER-TAX income of over $120,000 (over $200K salary) - and over $80K in savings after closing.

The insanity is seeing people spend over 45% or 50% of after-tax income on housing.

Posted by: saminthehood at September 15, 2009 12:16 PM

The insanity is alot of people are paying more in rent than they would if they bought a 300k apt. The only thing holding them back is the $60,000 downpayment. So to say someone can't handle a financial obligation because they were unable to pull 100s of 1,000s of dollars out of their couch cushions is stupid.

Posted by: dirty_hipster at September 15, 2009 12:25 PM

I agree with DH, people didn't get into" trouble about their ability to pay the mortgage because the home's value went down and they found themselves in a neagitve equity situation. They got into trouble because they couldn't make the monthly payments. Having savings going into the downpayment is no help at all, because those savings are gone and can't help you pay the mortgage! Its better to lend to someone who makes a 10% or 5% downpayment and has a year's worth of mortgage payments saved up in the bank. There's nothing magical about 20% - its not going to save your arse.

Posted by: dittoburg at September 15, 2009 12:34 PM

So to buy a 285,000 co-op (0% down the monthlies would be 1,900 per monthish) I would need to put down 70,000 and probably have to have several thousands more in savings to get a mortgage.

Yet i could waltz out today and get approved for a lease on a 2,000 dollar a month apartment.

Why? Does the bank have more risk than the landlord? At least the bank can seize the asset and sell to repay the defaulted loan. What can a landlord do if you don't pay rent? I hear NYC housing court is soooo landlord friendly NOT.

Posted by: dirty_hipster at September 15, 2009 12:49 PM

"So to buy a 285,000 co-op (0% down the monthlies would be 1,900 per monthish) I would need to put down 70,000 and probably have to have several thousands more in savings to get a mortgage."

Plenty of co-op boards will take 10% down. I guess its a question of whether banks will still lend at that amount down...

Posted by: wasder at September 15, 2009 12:51 PM

"Plenty of co-op boards will take 10% down. I guess its a question of whether banks will still lend at that amount down..."

But i hear it's impossible to get PMI now too - so we're stuck at that 20%

Posted by: dirty_hipster at September 15, 2009 12:54 PM

Sigh... Bankers must giggle when reading your some of your comments...

It's not about the monthly cost, or the nominal price of the property -- it's about total cost of home ownership, and the second biggest portion of that total cost is usually interest payments.

The best ways to reduce interest payments are (1) have a good downpayment and (2) pay more than the monthly minimum on your mortgage especially the first 5 years.

I do agree people should not spend their whole savings on the down payment, which means you really need to save 30% or so of the cost of the property you want to buy.

The one exception I would seriously consider would be young people just at the beginning of a career where they can very reasonably be expected to be making much much more money in 5-10 years (e.g., doctors, dentists, lawyers).

Posted by: northsloperenter at September 15, 2009 12:56 PM

"At least the bank can seize the asset and sell to repay the defaulted loan. "

How well has that been working out the last year or so?

Another reason banks want people to put 20% down is they don't want people foolishly overpaying for properties, because when people do and then they default the bank has no chance of getting their money back.

Posted by: northsloperenter at September 15, 2009 12:59 PM

DH, the difference is the bank doesnt want to own the real estate and take the price risk in the apartment itself--which is why they want the 20% down, to give them a cushion to do exactly what you say--grab the apt, turn around and sell it. if the mkt isnt moving they should come out basically whole (transaction costs etc would eat up pretty much the whole 20%). A landlord/owner in theory wants to take on the price risk or upside...and is willing to deal with the hassle of housing court

Posted by: woodys at September 15, 2009 1:05 PM

DH, just get an FHA loan, 3.5% downpayment. No higher default rate than privately bakced loans as I understand it, which sinks most of the arguments above about 20%.

Posted by: dittoburg at September 15, 2009 1:12 PM

Also I think 20% down is pretty lenient relative to most countries--in some countries you need like 50% down--and just about everywhere else in the world you cant get a fixed rate mortgage.

Posted by: woodys at September 15, 2009 1:13 PM

"I do agree people should not spend their whole savings on the down payment, which means you really need to save 30% or so of the cost of the property you want to buy."

I always thought when you saved for a home you should keep that money separate from your retirement, investments and emergency fund savings. I kept it in an entirely different account.

Posted by: TownhouseLady at September 15, 2009 1:25 PM

Point taken NSR/Woodys - thanks

anyone wanna loan me 100k?

Posted by: dirty_hipster at September 15, 2009 1:28 PM

Sure, DH -- but only if you put 20% down.

Posted by: Jail_Bait at September 15, 2009 1:47 PM

haha jail bait :(

Posted by: dirty_hipster at September 15, 2009 1:52 PM

everyone's seeing this 20% argument from an individual buyer's perspective. But the truth is that no one cares if YOU default on your mortgage, we care if A LOT of people do. Your excess leverage has a social cost.

dittoburg, DH: I don't know where you get the stat about FHA loans or what their underwriting criteria are, but it's clear that in general, people with higher equity are less likely to default. no one "above water" ever needs to allow foreclosure to happen, because by definition they can sell the house for more than the outstanding amount of the loan, and take money back.

Consider these things: First, if everyone has 5% down and home values fall 10%, no one can move. That's a disaster for the economy, because people can't take new jobs that require them to move. Second, if you borrow 500K and pay back 450K, YOU WIN. not the bank, not the broker, not the rating agency, not the government. YOU are the one who derived benefit from the transaction. Why? because a) you would have kept the profit had the value increased. You had what we call in finance a "free option". and b) Walking away from owing 50K is the same as making 50K.

There is one definition of a credit crisis, and only one: people borrow money and don't pay it back. Why congress is focused on CEO pay is beyond me. The only way to ensure that we avoid the "great recession" in the future is to require borrowers to make legitimate downpayments.

Posted by: joe_the_bummer at September 15, 2009 2:02 PM

THL, can you believe that even now, your opinion on savings is on the fringe?

Posted by: joe_the_bummer at September 15, 2009 2:04 PM

I know. I read my comments some times and I sound like such a Debbie Downer.

Don't misunderstand, I'm not some rich broad sitting on these huge stockpiles of cash. It's just whatever does come in I allocate and try to use pretty responsibly.

Direct deposit is my godsend. If I don't see it, I can't use it.

Posted by: TownhouseLady at September 15, 2009 2:16 PM

If you buy a whole house, you definitely need substantial cash reserves in case of emergency repairs. Don't you agree, THL?

Also, DH, in your calculations, you're forgetting the cost of maintenance. Depending on the condo, could push up monthly costs to $2800 or so.

Posted by: mopar at September 15, 2009 2:44 PM

"If you buy a whole house, you definitely need substantial cash reserves in case of emergency repairs. Don't you agree, THL?"

HECK YES! Especially these old houses. It's NEVER as simple a fix as it initially seems. One things always leads to another.

Posted by: TownhouseLady at September 15, 2009 3:04 PM

Lots of good info - thanks guys.

Now I know exactly why I'm too poor to own property. ;)

Posted by: dirty_hipster at September 15, 2009 3:10 PM

I'll admit, am not a saver, but I will work hard for things I want.THL you are certainly admirable but VERY rare nowadays.

I couldn't agree more with the previous posters who said financing 101 should be taught in our school systems. That, Home Ec,Nutrition and Estate planning should all come into the curriculum. It's just ridiculous to keep teaching kids classes like Trig and US history III.

Posted by: gemini10 at September 15, 2009 3:11 PM

"If the price of that 'starter apartment' drops from 500k to 250k, then you only have to save 50k."

But you won't be able to save because most likely you won't have a job.

I agree w THL, we were almost forty when we bought our first non-vaca property. Not because we couldn't have, but I didn't want all my money in a single asset class.

The whole bubble can be defined in a single sentence, and Greenspan got it wrong. It applies to any investment class, and real estate is an investment.

"Nothing goes up forever".

If you understand that, you're set for life.

Posted by: denton at September 15, 2009 3:19 PM

"But you won't be able to save because most likely you won't have a job."

Could be, but I don't work in finance...

I actually subscribe to the 3-4x annual gross salary = reasonable housing cost theory, so if you think a 'starter' apartment in NYC should be 500k then what I'm hearing from you is that the minimum income for someone to buy a big studio/small 1 bedroom in NYC is $167,000 per year.

I think housing prices have a long long long way to go downward in NYC.

Maybe not in Brooklyn Heights, Cobble Hill, and Park Slope, but elsewhere... yeah, there is a lot of room to drop.

But I also believe Keynes is correct: the market can stay irrational longer than you can stay solvent, so I'm not sure prices will actually drop, but rationally they should.

Posted by: northsloperenter at September 15, 2009 4:32 PM

Puh-leaze. There are plenty of starter apts in NYC for $200,000. Need more family-size two-family brownstones for $400,000 though! :)

Posted by: mopar at September 15, 2009 5:41 PM

So, Dipster, sounds like you want one of those Williamsburg FHA babies! (FHA provides its own PMI.) Assuming your income is what I think it is, all you gotta do is temporarily get your rent down to $1000 or so a month. Then you can sock away $1000 every month, and in just eight months or so, you'll be all set.

I know someone who just got a very small studio in the West Village for $1200/month. You don't want someplace too far out so you don't blow your savings on taxis. Cooking at home on Sundays inexplicably seems to help too.

Posted by: mopar at September 16, 2009 9:20 AM

Well although the rules are good or bad, new home buyers must need to get into all the information they need to avoid trouble in the future. I saw more stats of foreclosure problem in specialists websites like http://www.foreclosurelistings.com/

Posted by: tonycartman at September 16, 2009 1:15 PM

« Brownsville Affordable Project Gets State Funding Walkabout with Montrose: Faces I Remember »

September 15, 2009

New Rules for First-time Home Buyers

Trackback Pings

Comments

Post a comment

Latest Restaurant Additions