Home Buyers’ Down Payments Are Coming Back Down To Earth

Real Estate

The combination of skyrocketing home prices and intense competition prompted buyers to up their down payments during the pandemic. But as the housing market cools amid high mortgage rates and economic uncertainty–and buyers can no longer afford as much as they used to–down payments are falling from their peak.

The typical home buyer who took out a mortgage in July made a $62,500 down payment, according to Redfin, a technology-powered real estate brokerage platform. That’s up 13.6% from a year earlier–nearly double the growth in home-sale prices–and almost twice the median $32,917 down payment in July 2019, before the pandemic. But down payments have declined slightly in recent months after peaking at $66,000 in May and June. The dip is partly because the housing market is cooling amid high mortgage rates, inflation, stumbling stocks and widespread economic uncertainty.

Increased down payments and monthly mortgage payments near all-time highs made it more difficult for prospective buyers to afford homes. Higher monthly mortgage payments and the rising cost of other goods and services cut into buyers’ budgets, making it harder to come up with huge down payments. A slower housing market also means less competition for homes, which means buyers don’t necessarily need to offer large down payments to win a home.

The amount of money that buyers are putting into down payments–and the percentage they’re putting down–skyrocketed over the last two years amid the pandemic-driven home buying boom. Remote work and record-low mortgage rates drove scores of Americans to buy homes during the pandemic, and soaring demand pushed up prices and competition to all-time highs. Although prices are falling from their peak, they’re still near record highs.

Higher home prices are one factor in higher down payments. A 10% down payment, for example, is equal to $40,000 on a $400,000 home and $45,000 on a $450,000 home. Competition is another major factor, with buyers increasing their down-payment dollar amounts and percentages to attract sellers’ attention and communicate that they have plentiful finances to close the deal. If a home receives 10 offers, a common scenario over the last two years before the market slowed, prospective buyers may up their down payment to stand out from the competition.

In addition, all-cash purchases are at an eight-year high. And the share of mortgaged home sales using Federal Housing Administration and VA loans, which are available to buyers with relatively low down payments, is down from before the pandemic because it was difficult to convince sellers to accept them amid tight competition.

Now that the housing market is cooling, the buyers who can still afford to be in the market have more flexibility with down payments.

“Home buyers don’t need to make enormous down payments anymore because they’re much less likely to encounter bidding wars now that so many Americans have bowed out of the market,” said Redfin senior economist Sheharyar Bokhari. “And many buyers can no longer afford to put down 15% or 20% of the purchase prices.”

Between higher mortgage rates creating higher monthly housing payments and inflation pushing up the prices of everything from food to fuel, buyers need to set aside more money for everyday expenses. That, along with the slumping stock market, is cutting into down-payment budgets. While down payments will likely remain elevated above pre-pandemic levels, they’ll probably fall a bit in the short term.”

Down-payment dollar amounts have increased the most in Nashville

Three of the five metros where down payments increased the most in July from a year earlier are in New York or New Jersey. The typical down payment was $64,250 in Nashville in July, up 39.7% from a year earlier, the biggest increase of the metros in this analysis. It’s followed by Newark, New Jersey ($90,000, up 36.4% year over year), New York City ($197,875, up 34.8%), New Brunswick, New Jersey ($90,000, up 34.3%) and Charlotte, North Carolina ($48,200, up 32.6%).

Down payments fell from a year ago or stayed the same in seven of the 40 metros in this analysis, mostly in California. The typical down payment was $55,000 in Riverside, California, down 15.4% year over year, the biggest decline of the metros in this analysis. Next comes San Francisco, where the typical down payment of $364,000 was down 7.8% year over year. It’s followed by Oakland ($208,775, down 7.7% year over year); Warren, Michigan ($25,500, down 7.3%); Detroit ($14,250, down 5.2%) and Seattle ($157,500, down 2.4%). The typical down payment in San Jose was $330,000, unchanged from a year earlier.

Down payments likely fell from a year earlier or stayed the same in expensive places like San Francisco and Seattle because they are cooling quicker than other housing markets, with sale prices starting to decline in the Bay Area.

Denver has seen the biggest uptick in down-payment percentages

In percentage terms, down payments increased the most in Denver. The typical home buyer there made a 20% down payment in July, up from 15% a year earlier. It’s followed by Baltimore, where the typical buyer put 8.4% down, up from 5% a year earlier. Charlotte (13%, up from 10.1%), Nashville (15%, up from 12.1%) and Newark (20%, up from 17.7%) round out the top five.

Down-payment percentages declined year over year in five of the metros in the analysis. The median down payment percentage dropped to 10% from 15% in Riverside, California. Next comes Detroit, where the median down payment percentage dropped to 5% from about 7% a year earlier. It also declined in Las Vegas, San Jose, California and Milwaukee.

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