Down Payment Protection: Fuel for the Housing Market

By Joe Melendez @joemelvi as featured in RealtyTrac's Housing News Report May 2016

The average home stays on the market for about 75 days before a sales contract. If you sell real estate, wouldn’t it be nice to consistently beat that average? And to have more buyers bidding your sale prices up?

Of course. The real question is where do you find these new buyers?

Well, a lot of them are sitting on the sidelines wishing for a home but leery of what they saw (or experienced firsthand) in the housing market collapse of 2007. A good number of them have down payments in hand – either in their savings accounts or starter home equity – but they’re loath to risk their hard-earned nest eggs.

Mobile millennials

As you know, a home is still one of the best investments you can make: 79 percent of millennials my company recently surveyed said they were confident buying a home is more financially beneficial than renting. But in the new economy, people switch jobs and move more often, meaning homeowners may lack sufficient time to recover their down payment through rising home value. The average employee tenure in the U.S. is 4.6 years overall, and just 3 years for millennials.

We looked at down payment concern among millennial renters (age 18 to 34) late last year. Almost one-third (30 percent) lacked confidence that they would get back their full down payment if they were to buy a home today and need to sell in the next 2-7 years.

Yet despite occasional claims they’d prefer to rent, they really do want to own: Nine in 10 said it’s important to one day own their own home, or to become homeowners again. In similar survey this year, more than four in five millennials (83 percent) said owning a home is an important part of their American Dream.

It’s buyers’ turn for protection

Economists have spelled out the solution for decades: Buyers simply need the same level of protection everyone else in the transaction enjoys. Specifically, they need down payment protection.

Banks protect their mortgage loans by requiring borrowers to pay for title insurance, private mortgage insurance and homeowners insurance. But homebuyers have always gambled with their down payment. Often, but not always, the gamble paid off. Until now, it’s been hard for businesses or governments to piece together a viable mechanism to protect homeowners in the event their gamble fails.

At last, that mechanism is here.

What it is

Called +Plus, the new down payment protection works like the insurance homebuyers are already paying for at closing except that it protects the homebuyer: If the market falls and the homeowner decides to sell, +Plus will reimburse them up to the full value of a 20-percent down payment. The average cost for the protection is equivalent to less than a lunch per month.

If you want it today, go to Amalgamated Bank. +Plus is available on all eligible Amalgamated Bank mortgages. It’s included at no cost exclusively in the bank’s First-Time Homebuyer +Plus program, in that case covering down payments of up to 5 percent of the home’s purchase cost. Amalgamated Bank, whose stated purpose is “affordable and accessible banking for all,” is the first of many lenders that will make down payment protection available to its homebuyers.

“The gyrations of the housing market have made homebuyers acutely aware of the rewards and the risks of homeownership,” said James A. Wilcox, professor of economics and finance at the Haas School of Business at the University of California, Berkeley. “The general concept of down payment protection helps safeguard homebuyers’ hard-earned savings, assuring them that they can get at least a portion of their down payment back when they want to move. This will give homebuyers peace of mind, flexibility, and control.”

A superpower for agents

Although down payment protection chiefly benefits the buyer, it’s also a powerful new tool for any agent. As you know, a big part of your job as an agent is coaching the prospective the buyer through the natural anxiety of committing to a major financial decision. Most buyers feel vulnerable in the transaction especially to banks, which seem to be holding all the cards. As Professor Wilcox says, down payment protection brings peace of mind, flexibility and control to the transaction.

Flexibility is key. Modern homebuyers don’t want to be locked into a home when they might have to move, especially in an era when they can share cars, stream (versus buy) music and pay for smartphone service as they go. In this mobile society, home buyers will still be in homes for 30 years of their lives; it’s just more likely they will be a series of homes.

So by helping protect the down payment, you ease a big part of the stress of home buying. This brings more buyers to the table who are more eager to pull the trigger when they get there. It gives seller agents more pricing authority, more offers and quicker sales. It moves the lending conversation beyond the morass of points and rates. And it frees up inventory by encouraging move-up buyers to sell.

With down payments finally protected, you sell more homes faster at a higher price. And help your clients close on the American Dream.