Downpayment Trends - Is History Repeating Itself?

Recently released down payment data for the first quarter of 2015 from RealtyTrac shows us some interesting trends in what home purchasers are putting down on their homes, particularly those that are using FHA purchase loans to buy their homes.  It also gives us a sense of what  issue could create future problems for the U.S. housing market.

Here is a graphic showing how average down payments have changed since 2004:

The current down payment level of 14.8 percent is the lowest in the past three years, down from 15.5 percent a year ago.

This interesting graphic breaks down average down payment amounts by loan type:

As you can see, the average down payment for Federal Housing Administration or FHA purchase loans in the first quarter of 2014 was only $7609 compared to $72,590 for conventional loans.  As well, as a percent of all mortgage loans that originated in the first quarter, 21 percent were FHA loans in January, 22 percent were FHA loans in February and 25 percent were FHA loans in March.

Let's take a quick look at FHA loans.  The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development or HUD, helps people buy a home by letting them make a down payment as low as 3.5 percent of the purchase price, a level that was lowered in October 2014.  These changes were designed, in part, to help millennial and other first-time home buyers enter the housing market even if they lack the resources to pay a reasonable downpayment.  The FHA does not actually lend the money to potential borrowers, it guarantees the loan that is made by an FHA-approved lender (i.e. the federal government backstops the loans).  Properties financed with an FHA loan must be the borrower's primary residence and must be occupied by the owner.  The loans are limited to $271,050 (in 2014), however, in some high cost regions, the loans can be as large as $625,550.  Borrowers must have a minimum credit score of 500 which is extremely low considering that a score below 620 is considered subprime.  In an interesting twist, even though lending to some of these borrowers is extremely risky, in early January 2015, the Obama Administration issued an executive action directing the FHA to reduce annual mortgage insurance premiums by 50 basis points to 0.85 percent, an issue that was apparently a problem for many "marginal buyers".  The riskiest FHA mortgage borrowers will save a whopping $25 a month with smaller savings for more creditworthy borrowers, an amount that really shouldn't stand in the way of buying a home.

The share of low down payment loans (those loans with a loan-to-value ratio of 97 percent or greater or those loans that have a down payment of 3 percent or lower) rose to 27 percent of all purchase loans in the first quarter, the highest share since the second quarter of 2013.  The share of low down payment loans increased throughout the quarter from 26 percent in January to 27 percent in February and 29 percent in March with the volume of mortgage loans as a whole rising in March.  Of the FHA loans that originated in Q1 2015, 83 percent were low down payment loans compared to only 11 percent of conventional loans.

While the fact that 27 percent of all loans in Q1 2015 were low down payment loans doesn't seem overly concerning, here is a graphic showing the how the percentage of low down payment loans varies significantly:

Notice how many of the 20 largest counties with a low down payment share are in California, the state that has seen many of its housing markets become unaffordable as valuations are hitting post-Great Recession highs?  Markets with the highest percentage of low downpayment loans in the first quarter  of 2015 include Atlanta, Washington, D.C., El Centro, CA, Worcester, MA and both Charlotte and Greensboro in North Carolina.

It's interesting to see how desperate Washington is to kick-start the housing market even though potential purchasers are seeing mortgage interest rates that are at multi-generational lows thanks to the Federal Reserve.  With traditional mortgage lending drying up, government has stepped into the housing market in a big way.   Through the use of what can only be termed near-zero down payments, lowered mortgage insurance premiums and increased loan limits, government-sponsored enterprises like Fannie Mae and Freddie Mac and the Federal Housing Authority may well have set us up for a significant housing market problem in the future once mortgage rates return to normal levels and households find that they can no longer afford their "investment" in the housing market.  In the case of FHA's portfolio of (subprime) loans, the ultimate risk is held by American taxpayers.