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Like Car Sales: Short Term Housing Volume Comes Out Of Future Sales

One of the byproducts of the credit crunch has been the elimination or drastic reduction in loan products that allow a down payment of 10% or less [1], the reverse of the trend seen just months ago. People still want to buy homes in the US and will continue to do so.

However, if the national median sales price is about $220,000 [2], that means a down payment increase of $22,000 (ie changing from 0% down to 10% down). If we say the average household income [3] is about $45,000, that adds a few years, not months, to the time it takes to save for a down payment.

Enter the transition period between immediate gratification and saving for a down payment.

We are now entering a transition period that defers a portion of potential purchasers from an immediate purchase until they have the ability to save up for the downpayment. This will keep transaction counts surpressed for the next few years.

In effect, the no money down loan product types allowed homeowners to move the decision to purchase from some point in the future to today. In effect, lenders may have cannibalized future sales to sustain short term loan volume at the end of the housing boom in 2004-2005 (and guess which years of origination have the fastest growing default rates?).

We saw this in the auto market a few years ago. Carmakers offered rebates to encourage sales, but it had the effect of syphoning off a future purchases. I did that. Our car lease had six more months to go but we were solicited to go ahead and get a new car immediately and the old lease would be forgiven, even though we would have leased a car in 6 months anyway. We moved our decision ahead 6 months.

This will have the effect of prolonging weak demand for another few years I would think.