According to a recent report released by the National Association of Realtors (NAR), home buyers have been increasing the amount of money they put down as a down payment, in response to rising mortgage rates this year. In fact, the share of a home’s asking price that buyers put down has reached its highest level since 1997.
Rise in Down Payments for First-time Buyers
In the NAR’s annual Profile of Home Buyers and Sellers, it was found that the typical down payment for first-time buyers rose to 8% in 2023, up from 6% the previous year. While this may seem lower than what most people assume they need to put down, with housing affordability calculators assuming down payments of around 10% to 20%, a 2022 NAR survey revealed that 35% of people believe they need to put down 16% to 20% to purchase a house.
Options for Lower Down Payments
However, it is possible to put down much less than these assumed percentages. Some lenders are now offering 1% down payments to make home-buying more affordable in the current market. Additionally, first-time home buyers can put down as little as 3.5% with a Federal Housing Administration (FHA) loan. The only requirement in this case is that buyers would need to pay mortgage insurance to protect the lender in the event they are unable to make the payments.
Higher Down Payments for Repeat Buyers
For repeat buyers, the typical down payment increased to 19% in 2023, marking the highest share since 2005. This is higher than the 17% seen the previous year.
Rising Home Prices and Mortgage Rates
As home prices continue to rise and mortgage rates reach a 23-year high at around 7.5%, the housing market is becoming increasingly unaffordable for many buyers. The lack of homes available for sale has led to price increases, as buyers compete for a limited number of listings.
Increased Down Payments Reflect Competitive Bids
The NAR suggests that one of the reasons for the rise in down payments is the competitive nature of the market. Buyers may be offering more cash up front to present stronger and more attractive bids.
The Increasing Trend of Higher Down Payments in a Competitive Housing Market
According to a report by the National Association of Realtors (NAR), the down payment required for purchasing a home has either decreased or remained steady since 2005. However, recent years have witnessed a noticeable shift towards higher down payments due to a more competitive market and increased equity earned from previous home sales.
In situations where there are multiple offers on a property, it becomes crucial to make your offer shine. Jessica Lautz, the deputy chief economist and vice president of research at the NAR, advises that buyers may need to show more commitment by putting more “skin in the game” through a higher down payment.
Today, aspiring homeowners are facing the challenges of rising homeownership costs. The NAR states that the typical homebuyer now needs to earn $107,000, up from $88,000 last year, in order to afford the monthly payments on a median-priced home. Generally, experts suggest that a home is considered affordable if the buyer spends no more than 30% of their income on monthly payments.
On the other hand, repeat buyers have an advantage in leveraging the significant housing equity gained from their previous home. Lautz highlights that some buyers have accumulated enough equity to bypass taking on a mortgage entirely. In fact, she notes that 20% of homebuyers pay for their new homes in cash.
However, among first-time homebuyers, saving money for the down payment remains a considerable challenge for 38% of them. The NAR survey found that over half of buyers (54%) rely on their savings to fund their down payment.
Interestingly, first-time buyers this year have increased their reliance on financial assets. The NAR reports that 11% of them sold stocks or bonds to raise funds for the down payment. Another 9% tapped into their 401(k) or pension, 2% used their IRA, and 2% even sold cryptocurrency.
In conclusion, the housing market’s competitiveness has led to a trend of higher down payments. While challenges exist for first-time homebuyers, repeat buyers benefit from their accumulated housing equity. Aspiring homeowners must navigate these financial factors to achieve their homeownership goals.