Every bubble is characterized not just by froth, but sheer stupidity. In 2005, the median down payment was 2% of a home's value -- a number that basically rounds to zero. Nearly half of first-time homebuyers bought homes with no money down. In California, 60% of mortgages were interest-only or negative amortization.
Most of that is now long gone. Mr. Capitalism was mad as hell, swung his fist, and purged the insanity. It's what happens. You probably already knew that. But many would be surprised how far the correction has gone. Not only has most of the lunacy been eliminated, but an almost cult-like level of conservativeness has entered the market.
The real estate information provider Zillow.com collects data on the percentage of home transactions that are done with a mortgage. The opposite of this, of course, are homes bought with all cash. I used these numbers from a collection of 10 major cities across the country to form somewhat of a composite index of all-cash purchases. It's impressive:
Sources: Zillow, author's calculations.
Not only has the percentage of all-cash buyers exploded since the housing bust, but the level is now about 50% higher than before the housing bubble ever began.
Now, a lot of cash-only purchases are concentrated in upper-end markets with wealthy buyers. In California's insanely expensive Newport Beach, 67% of all transactions are now all cash. Not only can most of these buyers afford to pay all cash, but in some cases it's their only choice. Jumbo mortgages are still hard to get as the private mortgage market -- outside of Fannie Mae and Freddie Mac, which back smaller mortgages -- is a fraction of its former self.
Many cash-only buyers are also large investors buying up foreclosed homes en masse. These people rarely know much about what they're buying; the homes are purchased on the steps of local courthouses, often sight unseen. In that sense, all-cash bulk sales are sometimes looked at as widescale speculation -- not a sign that market sanity has returned. If prices don't rebound as speculators might hope for, bulk selling could hit the market.
The good news is that whatever happens to home prices, these all-cash bulk buyers will always have 100% equity. They'll never be underwater, and they'll never have the incentive to walk away from the property if things go haywire. It's the opposite of the housing bubble.
And these buyers aren't all speculators. In Las Vegas, the average home now costs just $109,000. A pretty modest household income can easily, easily, afford that, and a good portion of households could feasibly afford a purchase that size in all cash.
The big exception
If there's still a section of the mortgage market that still gives off a stench of the bubble years, it's the Federal Home Administration, or FHA. FHA loans are geared toward borrowers the private market won't dare touch -- those with low down payments, terrible credit, and low income. The FHA currently backs low-quality loans with as little as 3.5% down, and with a perfectly ruined credit score of 500, they'll back a loan with 10% down.
What's worrying is the FHA's market share has increased dramatically over the past few years as private subprime lenders fell into extinction. The FHA, in a sense, became the new subprime. From 1993-2003, FHA had about 8% share of the mortgage market. It fell to 1.75% in 2006 as private subprime flourished. Today, it's 12.61%.
That's troubling. As much of the mortgage market regains its wisdom, the still-reckless portion is growing. If there's one silver lining, it's that the FHA's surge doesn't pose the same kind of risk as the previous bubble. Shoddy loans are piling up on the balance sheets of taxpayers rather than the private likes of Wells Fargo
Have you applied for a mortgage lately? What's your experience been? Share your thoughts in the comment section below.