The Housing Market Is In Serious Trouble

What's up, Graham? It's guys here.

So, the housing market has taken yet another unexpected turn, because now you're officially able to buy a home for one percent down. That's right, this Phoenix charmer could be all yours for less than five thousand dollars, or if you like turtles, you can move right in here for less than the cost of a used Chevy Impala.

Okay, in all seriousness, these one percent down loans are now seemingly surging in popularity, and that begs the question: could this lead to a repeat of 2008? Are these loans going to push prices higher? And is this something that we should be worried about? After all, the housing market is apparently only a five percent decline away from more than 200,000 households falling into negative equity. Mortgage rates are currently sitting at their highest level in 23 years, and several markets are continuing to get more expensive.

That's why we got to discuss precisely what's happening, why these one percent down loans are not exactly as they seem, and what this could mean for the entire housing market. Since I have a feeling that most people never actually read the fine print, there are quite a few details in this that nobody is talking about.

Although before we start, if you appreciate all the research and information that goes into making a video like this, all I ask for in return is that you hit the like button or subscribe. That's it! It helps with the channel tremendously, so thank you guys so much.

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All right, now it's a bit of background. I probably don't have to tell you that housing prices are expensive. Nationally, values are 44 percent higher today than they were pre-pandemic. Mortgage payments are 54 percent higher in just the last year, and there appears to be no shortage of buyers and sellers waiting on the sidelines for things to settle down. Except now, there's another option: buy a home for one percent down.

That's right! Zillow has just unveiled their latest mortgage product aimed at helping undersupported Americans realize their dream of homeownership. If this sounds interesting or confusing, here's how it works. Normally, when you buy a home, you're required to put down anywhere between three and a half to twenty percent of the purchase price, depending on the loan, and then the bank will lend you the rest.

This means on a $350,000 home, you need to come out of pocket anywhere between twelve thousand to seventy thousand dollars at minimum just to be able to close, which is a lot of money for people to save. But not anymore! With Zillow, they will allow you to put one percent down, and then they will match you another two percent on closing, saying in a statement that this program could reduce the time eligible home buyers need to save and open homeownership to those who are otherwise ready to take on a mortgage.

From this perspective, those paying a high rent and unable to save would effectively be able to transfer their rent payment to that of a mortgage, and effectively be able to participate in the housing market and build equity. Or, I guess Zillow says this will help lower the barrier to entry and make the dream of owning a home a reality.

However, even though this sounds like a miracle dream come true for home buyers, the reality is, there's a lot of fine print that needs to be discussed, and most likely all of you watching are going to get denied.

First of all, in Zillow's case, even though they plan to expand, as of right now it's only a pilot program available to first-time home buyers in Arizona who make less than 80 percent of the area's median income. For Phoenix, this means that if you're single, you need to have an income below $25,456 a year in order to qualify.

And if you're curious how much home that'll buy you, you're going to want to listen to this. Assuming you have no other debt, most lenders would allow you to spend up to $933 a month on housing, which at a seven percent interest rate and $100 HOA qualifies you to buy a home that's worth no more than, wait for it, $110,000.

That means in Phoenix, you have a whopping two options to choose from. Take your pick between this one-bedroom, one-bathroom condo for $103,000 or this one-bedroom, one-bathroom for $98,500. That's it!

Of course, for full disclosure, this example only applies to the median income of a single filer, and if you include a full household—which usually includes a married couple or family—the median income jumps to $99,000, which would allow a buyer to qualify for a home around the $275,000 price point.

So, how does this work exactly? Well, Zillow uses local first-time homebuyer grants to help give you money upfront upon closing, and then, most likely, Zillow could make a small profit in exchange for putting the loan together.

Now, when it comes to my own thoughts on this, don't get the wrong idea because I'm not against it, especially when these loans are offered to people who ordinarily would be getting nothing. And these loans are exempt from having to pay PMI, which is usually a requirement anytime you have less than 20 percent equity in a property.

However, this is still not the entire picture for the buyer, because you're forgetting about another very important component when it comes to buying a home, and that would be closing costs. This includes things like inspections, appraisals, notary fees, escrow fees, insurance fees, and a variety of other miscellaneous expenses that they love to jab you with just because they can.

And typically, for the buyer, this equates to another two percent of the purchase price. This means despite being able to put one percent down to buy a property, you actually need more like three percent to be able to pay for closing costs. Realistically, we're like five percent to be able to furnish the home, have a bit of a buffer for savings, and pay the property taxes.

Although, even though this might not sound as good as it initially did, what's even more remarkable is that Zillow's not even the first company to have done this, and other companies are offering exactly this to everybody regardless of where you live, like with Rocket Mortgage.

See, back in June, they offered a program called OnePlus available to anyone nationwide, whether or not it's their first home, as long as their income is below 80 percent of the area median, and they had a credit score of 620 or higher. Personally, this seems like a much more dynamic program than Zillow, and I think the only reason people aren't talking about it is because everyone loves to hate on Zillow, especially after their failed home buying endeavor, which we'll save for another time.

Anyway, this OnePlus mortgage is only available to primary single-family residences. They'll give you two percent of the home's purchase price, as long as your total down payment is less than five percent. And in addition to the free savings, just like Zillow, you're not going to have to pay any PMI.

Overall, these products seem incredibly similar to one another if you're comparing one percent down loans, with the exception that Rocket Mortgage doesn't limit you to one location or being a first-time home buyer. But both of these, at the core, really just take advantage of publicly available grants that most people don't even realize exist, including some other options that take it a step further with no money down.

Let me explain. In terms of these mysterious no money down loans and the future of the housing market, most people have entirely forgotten that these have been an option already for over a year, and it originates from none other than Bank of America.

See, this was launched as a pilot program for first-time home buyers to help underserved neighborhoods in Charlotte, Dallas, Detroit, Los Angeles, and Miami. This would allow individuals and families to obtain an affordable loan with no money down, no closing costs, no PMI, and even more remarkable, no minimum credit score.

You know, even though these loans are intended to help underserved minority neighborhoods, eligibility is based entirely on income in the home's location, with respect to buyers being required to complete a home buyer certification course prior to applying. On top of that, even though it's technically a no money down loan, according to Bank of America, the company will make a down payment for the client in the form of a grant up to fifteen thousand dollars, giving them immediate home equity.

That way, they're not buying a $400,000 home for a $400,000 loan, and the moment they close, they instantly have fifteen thousand dollars worth of equity just in case the market begins to fall.

Although, in terms of my own thoughts on this, as well as the future of the housing market, here's what I think. First of all, it's a bit of a heads up coming from someone who's worked full-time in real estate since 2008. I generally recommend not putting zero percent down on a property.

The thing is, with mortgage rates rising, putting no money down tends to put you in a riskier spot financially. Your monthly payment is higher as a result, and unless the market just keeps moving higher, it limits your ability to sell without coming out of pocket for closing costs. That's why I think a better solution is to focus on saving more money today so that that way you have a bit of a buffer to fall back on, which our sponsor Rocket Money is able to help you with.

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All right, now in terms of the impact that low or no money down loans could have on the market, realistically, I just don't think there's going to be much of an effect. For instance, I think it's easy for people to have this narrative that thinks you're running out of borrowers to lend money to, so they're lowering requirements so they could issue more loans and make more money.

And sure, I bet there's some aspect of this that has to be profitable for the bank in order for them to want to do this, but I think it's very important to mention that these programs have been out there and running for quite some time. They just don't get advertised or talked about because they're not Zillow that everyone loves to hate on.

First example: Legacy Home Loans offered eligible candidates in six U.S. cities to pay one percent down with a free appraisal, a free home warranty program, home buying counseling, and financial assistance with closing costs. State Employees Credit Union also offered this in North Carolina with a hundred percent financing, no money down, without any PMI. USDA loans offered something similar for buyers who want to put no money down.

FHA Loans have required three and a half percent down with FICO scores as low as 580, and VA loans require no money down as long as the appraisal doesn't come in lower than the asking price. Honestly, the biggest issue that I see with all of this is that offering no money down loans at a time when median prices and mortgage rates are at their highest exposes the buyer to a lot of risk.

In the event they lose their job, their income declines, or something happens, in those cases, it's highly unlikely that they would be able to come up with enough money to sell their house when accounting for closing costs. And that could put them in a very dangerous position.

Just consider this: let's just say about a $400,000 home, no money down, a $15,000 Bank of America grant, and a loan of $385,000. If the market stays the exact same and you sell your home one year later for the same price of $400,000, six percent commissions and closing costs would leave you with $376,000 left over, meaning you'd have to come out of pocket $9,000 to exit your loan.

Okay, now even though that might not seem like a huge deal, if the market were to fall just five percent, you'd be left with $357,000 after closing costs, meaning you would have to come up with $28,000 just to sell your home after one year. Obviously, this presents a substantial risk that most likely the type of person putting no money down is not the same type of person who's able to come up with a large amount of money in the event that they need to sell.

And unless prices keep moving higher, they'd be stuck there making those payments, whether or not they could financially afford it. In terms of my own thoughts on this, as both a homeowner and a real estate investor, even though this could wind up helping a lot of people, you have to remember that at the end of the day, banks are in the business of making money, and it's really up to you to determine whether or not buying a house is the right choice financially.

After all, there's the reality that by owning a home, you're also responsible for property taxes, insurance, maintenance, and a whole bunch of miscellaneous repairs that you never seem to think about until they come up. And all of that needs to be considered, especially when a recent study found that renting is the cheaper option in all but four major U.S. cities.

Now, on a positive side, I do think these loans are incredibly helpful for those who have a stable income or are spending too much of their money on rent, are unable to save extra money, and know that they intend to live in the same place for more than ten years. Under those circumstances, I think one percent down mortgages are fantastic, and if the choice is between spending $1,200 a month on rent or $1,200 a month on a mortgage long term, I think the mortgage is going to win.

But short term, we have to acknowledge that anything can happen, and sometimes it's worth paying the premium of rent just to have the flexibility of being able to downsize or move in the event something happens.

Separate from that, there's also the concern that the housing market may soon start to fall, and according to the data, it's not out of the realm of possibility. Morgan Stanley, for instance, believes that home prices will begin to decline next year after remaining relatively flat in 2023. And by flat, I mean that national prices are only up 1.2 percent from a year ago.

In this case, though, their version of home prices dropping is only a two percent decline throughout the entire year. So if the prediction comes true, it's still not that big of a deal. But Zillow, on the other hand, is predicting a home run year again for houses, which could be why they're betting on one percent down mortgages.

If we switch gears from bearish to bullish, Zillow believes that home prices will rise six and a half percent by July of 2024, all because inventory is the tightest it's ever been in history. In fact, it appears as though the higher interest rates go, the less likely sellers are to sell, which causes inventory to dry up even further, causing prices to go even higher, as weird as that is to say.

Plus, even Goldman Sachs is now jumping on the bandwagon that home prices are not going to be declining in 2024, which kind of seems odd to say with mortgage rates currently surpassing seven percent. But you have to admit, low inventory is causing a home buying crisis, and until inventory improves or mortgage rates drop, this is likely going to persist for quite some time.

So, as far as what I think in terms of little to no money down mortgages, no, I don't think this is going to have a large effect in the market. These programs have already been available for longer than a year, and if they would have had an effect, we would have seen it already.

As far as everything else, though, I think we could tend to agree that the market overall makes no sense. I know it's kind of weird to think this way, but I generally like to see myself as a barometer of the market, and if I’m interested in buying, I tend to think other people are as well. But right now, financially, there's very little that makes sense to purchase, and I’m not going to lie to you and say I see an opportunity for most people because I don’t.

That's why, for the time being, I'm doing my best to save as much money as I can. I'm keeping an eye on the housing market just in case anything changes. I only buy things that I intend to fix up and hold long term, and I recommend everyone be cautious about overextending themselves buying a house just because you're able to qualify for the loan.

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Thank you so much for watching, and until next time!