Down payments made by homebuyers have increased by almost 25 percent over the past year, with buyers attempting to make as large a down payment as possible to reduce their monthly mortgage payments, according to real estate brokerage Redfin.
“The median down payment for U.S. homebuyers was $55,640 in February,” according to a March 29 press release by Redfin. “That’s up 24.1 percent from $44,850 a year earlier—the largest annual increase in percentage terms since April 2022. The typical homebuyer’s down payment last month [February] was equal to 15 percent of the purchase price, up from 10 percent a year earlier.”
Part of the reason why down payments have increased is that home prices rose 6.6 percent year over year in February, Redfin noted. Elevated housing costs, from high mortgage rates and high home prices, are incentivizing prospective buyers to commit to bigger down payments, it said.
This is because a large down payment ensures the loan amount on a property is smaller, which translates into lower monthly interest payments.
“Homebuyers are doing whatever they can to pull together a large down payment in order to lower their monthly payments moving forward,” said Rachel Riva, a Redfin real estate agent in Miami. “The smallest down payment I’ve seen recently is 25 percent. I had one client who put down 40 percent.”
A median-priced home is currently worth $374,500. If a prospective buyer was to put 15 percent in downpayment, they would have to pay $2,836 as monthly repayment at the interest rate of 6.79 percent.
If the buyer only puts 10 percent as down payment, with other conditions remaining the same, they will have to shell out $2,968 a month, or an extra $132.
According to the “2023 Profile of Home Buyers and Seller” report from the National Association of Realtors (NAR), “the typical down payment for first-time buyers was 8 percent, which is the highest share since 1997, when the typical down payment was 9 percent for first-time buyers.”
“The typical downpayment for repeat buyers was 19 percent, which is the highest share since 2005 when the typical downpayment was 21 percent.”
For 54 percent of homebuyers, the source of downpayment funds was personal savings. For repeat buyers, 53 percent used proceeds from the sale of a primary residence. Twenty-three percent of first-time buyers used a gift or loan from family or friends to pay downpayment.
Housing Affordability Situation
It is not just the down payments that have increased; the annual income required to purchase a home has also gone up.“Affordability is the biggest issue—finding a home that’s in your budget. The higher the price of a home, the harder it is to come up with the down payment or to qualify for the monthly payment,” said Bankrate housing market analyst Jeff Ostrowski. “Home values are near record highs, and if you want a house, you have little choice but to pay a high price.”
According to Redfin, a typical American household earns almost $30,000 less than it needs to buy a median-priced home.
Buyers had to make an annual income of $113,520 to afford the median-priced home worth $412,778 in February. That is 35 percent more than the $84,072 median household income.
“For over a decade, America has been slowly marching toward a housing affordability crisis due to chronic underbuilding, and that crisis was kicked into overdrive when the pandemic homebuying boom fueled a meteoric rise in housing prices,” said Elijah de la Campa, Redfin senior economist.
“Now there’s another culprit squeezing homebuyers: elevated mortgage rates. We’re slowly climbing our way out of an affordability hole, but we have a long way to go.”
A key factor that affects the availability and affordability of homes in the United States is the baby-boomer demographic.
A Redfin analysis found that 78 percent of senior American homeowners intend to stay in their current homes as they become old. It found that “empty-nest baby boomers own 28 percent of three-bedroom-plus U.S. homes, while millennials with kids own just 14 percent.”
“Baby boomers have an outsized impact on the housing market because they’re most likely to own homes. Nearly 80 percent of boomers own the home they live in, compared to 55 percent of millennials,” the real estate brokerage stated.
As such, the decision of many baby boomers to stay in their homes as they age could negatively affect the housing market by creating a shortage of homes for sale.
Inventory is already at low levels because the current high mortgage rates are discouraging many owners from selling their homes that have low mortgage rates.
Many of these homeowners fall under the baby-boomer demographic. “Baby boomers staying put is one reason young Americans are having a hard time finding a family home.”
Daryl Fairweather, Redfin chief economist, pointed out that many homeowners will eventually need to move to a place that meets their age requirements, like a senior-living community.
However, “the government isn’t prioritizing building housing for seniors, which is further encouraging older Americans to stay put, exacerbating the inventory shortage,” he said.
“Politicians should focus on expanding housing stock that meets the needs of older Americans, which could help with housing affordability and availability for all.”
