Will Down Payment Requirements Impact The South Bay?

Six agencies, including the Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, are proposing risk retention rules under the Dodd-Frank Act that requires lenders that securitize mortgage loans to retain 5 percent of the credit risk unless the mortgage is a qualified residential mortgage (QRM). What this means is that unless borrowers make a 20% down payment they will likely be saddled with additional fees to offset lenders’ higher costs. The purpose is to create strong incentives for responsible lending and borrowing.

The National Association of Realtors (NAR) is opposed to this proposal because they rightfully believe that it will negatively affect housing demand, as some prospective buyers will be priced out of the market. NAR even pulls the emotional card by listing median salaries for military Staff Sergeants ($30,176), public school teachers ($33,530), and firefighters ($47,730), positing that the honorable men and women in these positions will be forced to save for decades to afford down payments.

Housing, like any asset, is only worth as much as people are able, or willing, to pay. Driving lenders to tighten credit standards will decrease the amount of debt capital available for home purchases, but is that a bad thing? Good and bad are relative value judgments, so it depends on which side of the argument you find yourself. If you are a current home-owning firefighter you probably would like to see prices go higher. If you’re just out of firefighting academy and starting your career, you probably wouldn’t be too sad to see prices come down further! This is just one example of how positions on public policy boil down to interest group favoritism, rather than black and white good and bad.

How will tightening lending standards affect the South Bay? Los Angeles’s South Bay markets are governed by the same economic constraints as the rest of the world, but we do have unique circumstances that vary from other markets. The median home value in Manhattan Beach, for instance, is $1,274,500, while median home income is just over $100,000. That differs hugely from national markets where median sale price is $186,200, and median home income is less than $45,000.

Increased down payment requirements will likely have the biggest impact on lower income demographic groups, pricing buyers on the fringe out of the market, for a time. A drop in the number of buyers will reduce prices in lower value markets. From a very broad economic perspective, even higher valued markets will likely see some buyers migrate to lower priced markets to scoop up deals. This effect will likely be strongest for middle markets, like North Redondo Beach, and weakest for the highest priced markets, like Manhattan Beach.