This morning I heard on the news that United Wholesale Mortgage, the largest mortgage lender in America, is offering what is essentially a zero down mortgage. It works like this: The lender writes a 97% mortgage with a 3% second mortgage, but it's the same thing as a zero down mortgage. I couldn't be happier to see this.
I say this as someone who was on the front lines of the real estate market when zero down mortgages were all the rage in the 2000s, before the market crashed and the Great Recession made fools of us all.
If you've been sitting on the housing market sidelines because you've not been able to hustle up enough cash for a down payment, this might be a financial product you're considering. Let's take a look at what it is and if it's going to set you up for failure.
The problem with underwater mortgages
Buying a home with no money down has long been viewed by some as some sort of moral failing. After all, if you don't put anything into your purchase, why would you stick it out if the going got tough? People who say this, of course, fail to recognize what a home is and what you're actually putting into it every day of your life.
It's not a storefront that you're simply renting out to someone else; it's your home. It's the place where you might raise your children, where you have game night with your friends, where you decided that you wanted to go back to school or learn to forge swords in the garage. A purchased home is a foundation of social stability, whether you have tens of thousands of dollars to bring to closing or not.
The problem, some people argue, is that once your home isn't worth as much as you paid for it, you'll walk away. And yes, that definitely happened pre-2008, but it was a very different time and homes were substantially easier to secure. People were also not staying in them as long. According to a 2018 analysis by Realtor.com, homeowners now typically stay in their home about 13 years, rain or shine (though that is likely longer considering post-pandemic trends).
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Honestly, this data point alone counters the whole idea that if your mortgage goes upside-down (you owe more than your property is worth), you're going to boogie. Because, much like with the stock market, corrections happen within the housing market over that much time. You're not going to be upside-down forever.
The 2008 real estate market crash: A case study in underwater mortgages
Let's look at the real estate market crash in 2008 as a great case study in how underwater mortgages inevitably recover. According to data from the Federal Reserve Bank of St. Louis, the peak median sales price of a home prior to the 2008 real estate crash was $257,400 in Q1 2007. Since mortgage rates were about the same then as they are now, this is a great worst-case scenario.
By Q1 2009, that same median home was worth $208,400 -- a 19% drop in equity in just two years. It was intensely alarming to all of us in the industry at the time.
But let's see what happened to those homes 13 years after purchase, in Q1 2020. Everything changed once the pandemic kicked in, but Q1 2020 was still business as usual, and the median home sales price by that point was $329,000, a nearly 28% increase from 2007, despite the fact that home values had taken a serious bath in between those two points.
In fact, it only took until Q1 2013 for homes that were potentially underwater to be in the clear again -- all those zero down homes had regained their equity in just six years, despite a massive recession, the housing market imploding, and everything going wrong.
Time for a table!
| Time period | Median home sale price | Equity position for 0% down loans | Change from 2007 |
|---|---|---|---|
| Q1 2007 | $257,400 | $0 | N/A |
| Q1 2009 | $208,400 | -$49,000 | -19.0% |
| Q1 2013 | $258,400 | $1,000 | 0.4% |
| Q1 2020 | $329,000 | $71,600 | 27.8% |
Data source: The Federal Reserve Bank of St. Louis.
Is a zero down mortgage a path to financial ruin?
The reemergence of zero down mortgages, while in a little bit of a different form, is neither surprising nor especially worrisome for the economy or for you, individually. As long as you're choosing a fixed-rate mortgage with a payment you can afford, the equity you do or do not have in a downturn is generally a non-issue. I say "generally" because there are specific reasons why you might have no option but to sell, but these are rare and affect only a small percentage of the population.
If you're looking for a house to make a home, and the only way to do that is with a zero down mortgage, then go for it. It's not the path to financial ruin. In fact, homeownership has been shown over and over again to be a path to financial stability, as long as it's undertaken thoughtfully and with the intent of remaining in your home long term.
Put another way, would you rather own your home, knowing that you had no equity but the freedom to do what you will and the knowledge that your payment would not change year to year, or would you rather rent -- with all the rules and uncertainty that comes with that?
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