This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: The U.S. housing bubble of the early 2000s sent home prices soaring before the market crashed in 2007–08, triggering a foreclosure crisis and a deep recession. A popular explanation is that lenders suddenly made it much easier to buy a home with a very small down payment.
Ben McCartney, an assistant professor at the University of Virginia's McIntire School of Commerce, examined 25 years of mortgage data and found a different story. McCartney spoke with UVA Today about what the data reveal about who took on the risk during housing booms and busts and what it means for today's homebuyers. There's a very common story about the housing bubble that goes something like this: Suddenly, people could buy homes with only 5% down, which brought a flood of highly leveraged buyers into the market, and home prices skyrocketed.
The problem is that this story is essentially at odds with the data. Low-down-payment mortgages were already extremely common before the housing boom, remained common during it and remained common afterward. What changed dramatically was who supplied them.
Before the boom, many were backed by the FHA (Federal Housing Administration) and the VA (Department of Veterans Affairs). During the boom, private lenders took over much of that market. After the crash, FHA and VA stepped back in.
But the use of low-down-payment mortgages hardly changed at all. Because it challenges a very influential explanation for housing booms. If easier down-payment requirements were pushing prices higher, we should see buyers borrowing an ever-larger fraction of their homes' values during booms.
The amount of mortgage debt relative to the value of the house (the loan-to-value ratio, or LTV) was remarkably stable, even in places where home prices boomed and then crashed much more dramatically. The striking thing is that higher home prices recently have also not been financed by buyers borrowing a larger share of the purchase price. If anything, the opposite has happened recently.
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