As housing prices soared last year, an eye-popping 43% of first-time
home buyers purchased their homes with no-money-down loans, according
to a study released Tuesday by the National Association of Realtors.
The trend is potentially ominous. The real estate
market is cooling in some areas, and rates on adjustable-rate loans are
creeping up. As a result, some no-money-down buyers could owe more than
their homes are worth.
Who are entry-level
buyers?
Survey of home buyers
reveals:
Median age:
32
Median household income:
$57,200
Median down payment:
2%*
Purchased with no money down:
43%
* on home costing
$150,000
Source: National Association of Realtors, 2005 Profile of Home Buyers
and Sellers
The median first-time home buyer scraped together
a down payment of only 2% on a $150,000 home in 2005, the NAR found.
Already, home prices in many areas are declining,
and the "For Sale" signs are hanging in front yards longer. There's now
at least a 50% risk that prices will decline within two years in 11
major metro areas, including San Diego; Boston; Long Island, N.Y.; Los
Angeles; and San Francisco, according to PMI Mortgage Insurance's latest
U.S. Market Risk Index.
"In a number of areas, particularly on the
coasts, they have a high risk of price declines in the next two years,"
says Mark Milner, chief risk officer of PMI.
Red-hot home building, acquisitions, remodeling
and refinancing in recent years helped drive the economy and raise fears
of a real estate bubble. Dean Baker of the Center for Economic and
Policy Research says that if housing prices fall at least 10%, it could
be even more damaging than the collapse of the high-tech stock bubble in
2000.
"If we do get a spike in mortgage rates, and a
modest decline (in the housing market) turns into a rout, there's almost
no bottom to that," Baker says. "That's a crash scenario."
Baker and other economists are concerned that
many lenders have pushed a series of creative but potentially dangerous
loans to help more Americans afford a home. The traditional 30-year loan
with a fixed rate remains the most popular way of financing, according
to the Mortgage Bankers Association. But about one-third of homeowners
take out riskier loans, such as interest-only or flat-minimum-payment
mortgages.
"These non-traditional loans transfer risk to the
borrower," Milner says.
NAR President Thomas Stevens says he isn't
worried that nearly half of first-time home buyers put no money down,
but adds, "If the number was higher than that, I'd be concerned."
