Buyers gamble with little down

The meteoric rise in home prices has been accompanied by a sharp shrinkage in the size of down payments made by cash-strapped buyers, a trend that could portend a spike in future foreclosures, new research shows.

Nearly four out of 10 (38.1 percent) homebuyers who bought houses in the first half of 2005 put down less than 5 percent of the purchase price, up from 30.6 percent in 2000, according to a study released Tuesday by SMR Research Corp., a Hackettstown, N.J., firm that tracks mortgage debt. Nearly half (49.9 percent) of buyers put down less than 10 percent, up from 44.8 percent in 2000.

Another potential red flag is the growing use of "piggyback" loans.

Traditionally, homebuyers who did not come up with a 20 percent down payment had to pay an added cost each month for private mortgage insurance. But recently, more strapped borrowers are taking out two loans -- one for 80 percent of the purchase price and a second, or piggyback, loan in the form of a line of credit or home equity loan. So far this year, nearly half (48.2 percent) of buyers used piggybacks, up sharply from 19.9 percent in 2001.

The statistics suggest that many homebuyers are stretching their budgets well beyond their means. The risk is that recent buyers have such minuscule equity in their homes that if prices fall, they could owe more on their mortgages than their homes are worth.

The National Association of Realtors says the median price of an existing home rose 13.6 percent to $208,500 from the second quarter of 2004 to the second quarter of 2005. In Brevard County, the median home price rocketed to $238,800 in June, up from $169,500 a year earlier.

Americans' ability to take on massive mortgage debt has been fueled by the availability of "exotic" mortgages, such as interest-only loans and adjustable-rate mortgages that provide borrowers with a lower monthly payment for a short period of time, says Dean Baker, co-director at the Center for Economic and Policy Research.

"Home prices are going through the roof, forcing people to turn to exotic loans and unorthodox financing," Baker said. "These people have no room for error."