Where are the new buyers?

Another great post today over at Irvine Housing Blog. This one tackles the "credit crunch" and 100% financing for home purchases. I would like to focus on the 100% financing issues - especially for the first time home buyers. Contrary to the Great Housing Bubble myth, there is only a finite number of first time home buyers. As stated so eloquently from Irvine Renter -

Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. There is usually a steady stream of first-time buyers that enters the market each year as they saved enough for their downpayment. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayments came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for their downpayment. What was worse was those late buyers who were “borrowed” from the future buyer pool overpaid and many lost their homes. This eliminated them from the buyer pool due to poor credit for several years. Everyone who thought 100% financing was a dream come true found it to be a nightmare instead.

This is especially true of those who bought using negative amortization - teaser rates and liar loans. They also have the least interest in staying in their homes or paying the banks back. Many of these people lived in place they could not afford - and with teaser rates "owning" became significantly cheaper than renting.

Some of these people really were going to save up and become future purchases - they were seeing housing rates soar. A house they could afford one year was unattainable the next - they felt if they did not jump in they would be completely left out. Many others were just taking advantage of an excellent opportunity - live in a great property for no money down with a small monthly fee. Even if they lived in the property for just for a year they were living a lifestyle that was out of reach in a normal reality.

And everyone was doing well while these people were living their ultimate lifestyle. Realtors fees were high. Mortgage brokers making great commissions. Banks turning bad mortgages into fancy CDO's and SIV's and generating great profits. In addition to all of the supporting industries making money hand over fist - appraisers, inspectors, state real estate taxes, etc. Why would anyone want to stop and question the party?

But as Irvine noted - "Everyone who thought 100% financing was a dream come true found it to be a nightmare instead." That includes banks, mortgage brokers, realtors, etc. as well as the home "owners."