Housing: put it down

Arnold Kling, meanwhile, makes a plea for the return of the 30 year amortizing mortgage:

If I were the czar of the mortgage market, I would attempt to bring back the 30-year amortizing fixed-rate mortgage with a 20 percent down payment. As recently as fifteen years ago, this was the workhorse of the housing market.

I think that a housing market that is based on mortgages with low down payments is inherently unstable. The buyer's equity comes almost entirely from house price appreciation. That means that in a rising market, everybody can buy a home. In a flat or falling market, nobody can buy a home. [note: Bob Shiller wants mortgages that are indexed to home prices. Such mortgages might adapt to this problem, but I would rather avoid the problem in the first place.]

I don't think the fixed rate is what matters.  In fact, though I'm not sure that I've seen this reported anywhere, fixed rate mortgages make the housing market more unstable, because house prices vary more sharply with interest rates.

Of course, the lurid stories we're hearing now are all about people locked into houses with rates they can't afford.  But that's because their downpayments were so miniscule.  In a normal market, they could sell and walk away, taking perhaps a small loss.  But with little or no downpayment, even a small movement in the value of their home wipes out all their equity, leaving them with no way out except foreclosure or bankruptcy.  If you can't come up with the cash for your mortgage payments, you certainly can't come up with a big check to hand over at closing to make up the difference between the mortgage and the sale price.

Liberals are blaming the banks, and conservatives the government, for the push into no money down housing purchases.  But the fact is, we're all at fault.  Everyone in the country--buyers, sellers, financial advisors, bankers, regulators--became convinced that owning a home was a surefire ticket to wealth, and that therefore everyone could and should buy one.  Now we're surprised that we've gotten into exactly the same trouble as everyone else who thinks they've got a way to make money without working.