California's low-down payment market is dwindling, but exactly why is as uncertain as the state's economy -- the culprit that's likely driving the trend -- for better or worse.
The number of California home buyers who got in with low down payments dropped 6.1 percent during the third quarter from 36,586 last year to 34,359 this year, according to La Jolla-based DataQuick, a real estate information service.
Last year's figure was the second highest on record, behind 42,943 for second-quarter 1999 and it indicates a growing trend. The peak and subsequent dip came after the number of low-down buyers more than tripled from 1990 to 1999, far outstripping California's overall increase in home sales, DataQuick said.
Low-down payment buyers are often first timers and experts say the same economic factors that may have knocked some of them out of the market allowed others to get in with larger down payments. In any event, the data is yet the latest in a string of indicators that the economic bear could become as permanent as the Grizzly on the Golden State's flag.
Stock Values It's obvious Wall Street has whipsawed some buyers' portfolio's forcing them out of the market or at least into a hopeful holding pattern that prices will fall -- especially in high cost areas. The year-over-year decline in low-down payment purchases was steepest in the tech-investment heavy Bay Area at 35.7 percent, from 4,406 to 2,835, according to DataQuick.
"Many of the young, first-time, low down payment buyers in the Silicon Valley area were funding their purchases out of small technical stock investment portfolios with stocks that were either part of company stock options, or company stock purchase plans or just small trading accounts," says Fred Martin, of CyberHomeSearch with Century 21-Alpha in Campbell, CA.
"The recent sharp decline in the values of technical stocks has reduced or wiped out many of these small speculative investment portfolios" he added.
But as the stock market has teetered, housing prices have continued to rise in hot pockets.
"Multiply this effect by thousands of other potential buyers and you will slow down such purchases in Silicon Valley," Martin said.
The flip side argument is that those smart enough to have cashed in their stock market returns before the slide have had time to examine the market and the money to buy big.
"I've had quite a few young, high-tech people who are buying their first homes, and have obtained the down payments from stock option exercise and sales. In all cases, we're talking about pretty good chunks of change, hundreds of thousands of dollars in stock money, with corresponding high taxes, but still leaving a lot of money for making large down payments on the homes they're buying," says Sunnyvale, CA-based certified public accountant Leonard W. Williams.
"Now of course, there is a time lag and, as you point out, with the stock market tanking I haven't had any new such clients in the past couple of weeks," Williams added.
Mortgage planner Rob McCarthy with 101Loan.com said he's not sure about the source of the funds, but more buyers than ever are flush with savings.
"In 1998, I must have assisted at least 30 buyers with zero-down financing and about 10 with 3 percent down financing with the rest between 10 and 20 percent down. Out of the 120 closings to date this year. I only closed three buyers with zero-down financing and none with 3 percent down financing. With five percent down, I may have closed another 10 to 15 and the rest were 10 percent or more down," says McCarthy.
DataQuick says there aren't necessarily fewer first-time buyers just more of them making larger down payments to cash in on flat prices outside California's housing strongholds.
The median mortgage payment for low-down purchases in the third quarter was $1,019. That was down from $1,037 for the previous quarter, and up from $947 for 1999's third quarter. Ten years ago, in third-quarter 1990, it was $1,008, according to DataQuick.
"Today's market is actually pretty good for entry-level buyers," said Mike Ela, DataQuick's president.
"One reason is that prices in entry-level neighborhoods have not increased as much as prices in mid- and up-market areas. The median price paid for a low-down home was $142,000 last quarter, up 5.2 percent from $135,000 for third-quarter 1999. The statewide median for all homes was $210,000 last quarter, up 11.1 percent from $189,000 a year ago," Ela said.
In Southern California, the decline in low-down purchases was only 17.7 percent, from 26,838 to 22,079. In the Central Valley it dropped 10.9 percent, from 9,074 to 8,086, DataQuick reported.
"While price levels get a lot of attention, it's actually the size of the mortgage payment that makes or breaks most home purchases. Willing lenders and reasonable interest rates make the borrowing environment pretty good right now," Ela said.
Fewer starter homes
There simply aren't enough properties to draw low-down payment buyers in the San Francisco Bay Area. High cost housing forces buyers into jumbo loan programs where low-down programs are scarce.
"If you go back to Aug. 1, there were no homes listed under $150,000, 10 days-of-inventory (DOI) of homes from $150,000 to $200,000; 16 DOI for homes $200,000 to $250,000; 25 DOI for $250,000 to $300,000; 28 DOI for $300,000 to $350,000; 33 DOI for $350,000 to $400,000. The entire market had 43 DOI," said realty statistician Richard Calhoun, broker-owner of Creekside Realty in Campbell, CA.
Days of inventory is a theoretical number indicating how long the current supply of homes would last at the current sales pace if no new listings became available.
"Today those same numbers are no homes; no homes; no homes; no homes; 3 DOI; 12 DOI. The entire market has 32 DOI. I maintain that it is hard to sell something that does not exist," Calhoun said.