The Average Down Payment on Homes Increases by Almost 25 Percent in One Year, Reaching Nearly $56,000
In the ever-changing landscape of the housing market, one trend stands out: buyers are making larger down payments than ever before. According to a recent report by real estate brokerage Redfin, the average down payment on homes has increased by nearly 25 percent in just one year, reaching a staggering $55,640.
This surge in down payments can be attributed to several factors. Firstly, home prices have risen by 6.6 percent year over year, making it more challenging for buyers to afford a home without a substantial down payment. With mortgage rates and housing costs on the rise, prospective buyers are motivated to commit to larger down payments in order to reduce their monthly mortgage payments.
Rachel Riva, a Redfin real estate agent in Miami, explains that buyers are doing whatever they can to gather a large down payment to ease their financial burden in the long run. Riva shares that she has seen down payments as high as 40 percent from some clients. This dedication to larger down payments is driven by the desire to lower monthly payments and make homeownership more manageable.
The impact of down payment size on monthly mortgage payments is significant. For example, if a buyer puts down 15 percent on a median-priced home worth $374,500, their monthly repayment would be $2,836 at an interest rate of 6.79 percent. However, if the buyer only puts down 10 percent, their monthly payment would increase to $2,968, an additional $132 per month.
The National Association of Realtors (NAR) also sheds light on down payment trends. Their “2023 Profile of Home Buyers and Sellers” report reveals that first-time buyers typically put down 8 percent, which is the highest share since 1997. Repeat buyers, on the other hand, have been making down payments of 19 percent, the highest share since 2005. The report also highlights that 54 percent of homebuyers rely on personal savings for their down payment, while 23 percent of first-time buyers receive assistance from family or friends.
While the increase in down payments is a notable trend, it is not the only challenge facing homebuyers. Affordability is a growing concern, with the income required to purchase a median-priced home rising by almost 50 percent in the past four years. According to Bankrate, U.S. citizens now need to make over $100,000 a year to afford a median-priced home. This affordability crisis is exacerbated by the fact that the typical American household earns nearly $30,000 less than what is needed to buy a home.
Redfin’s senior economist, Elijah de la Campa, suggests that chronic underbuilding and the recent surge in housing prices during the pandemic are contributing factors to the affordability crisis. Additionally, elevated mortgage rates are further squeezing homebuyers, making it even more challenging for them to enter the market.
One key demographic that has a significant impact on housing availability and affordability is baby boomers. A Redfin analysis reveals that 78 percent of senior American homeowners plan to stay in their current homes as they age. This decision creates a shortage of homes for sale since empty-nest baby boomers own a large portion of three-bedroom-plus homes, while millennials with kids own significantly fewer.
The reluctance of baby boomers to sell their homes also aligns with the low inventory levels caused by high mortgage rates. Many of these homeowners have low mortgage rates and are discouraged from selling. This scarcity of available homes, coupled with the increasing demand from younger buyers, creates a challenging environment for those looking to purchase a family home.
Daryl Fairweather, Redfin’s chief economist, suggests that policymakers should prioritize building housing options that meet the needs of older Americans. This approach would not only address housing affordability and availability but also alleviate the strain on the housing market caused by a shortage of homes for sale.
As the housing market continues to evolve, it is crucial for buyers to adapt to the changing landscape. Larger down payments have become a necessity for many, as they strive to make homeownership more feasible in the face of rising home prices and mortgage rates. However, addressing the affordability crisis and ensuring housing availability requires a comprehensive approach that considers the needs of all generations. Only with a multifaceted strategy can we hope to create a housing market that is accessible and sustainable for everyone.
