Buying conditions may be tough, but homebuyers are coming to the table with bigger down payments.
The US median down payment increased 11.3% year over year in the third quarter to $30,434, marking the highest total since Realtor.com started tracking the data in 2013. The average down payment percentage reached 14.71% of the purchase price in the same period, also the highest in the last decade.
The trend suggests that homebuyers in today’s market have the incentive and means to contribute large payments. They are leveraging their wealth — whether it is equity or cash — to beat out competitors without the same access.
"The people who are able to play ball in this interesting market are more likely to be higher earners," Hannah Jones, economic research analyst at Realtor.com, told Yahoo Finance. "Also because inventory is so tight and mortgage rates are so high, it's creating a more competitive environment where people are more likely to put more down as a means of competition because there's such limited inventory on the market."
The US median down payment increased 11.3% year over year in the third quarter to $30,434. ·ASSOCIATED PRESS
Down payments continue to rise
The median down payment amount grew 118% in the last four years to nearly $30,500 in the third quarter from $13,937 in the third quarter in 2019 before the pandemic began, according to Realtor.com’s data.
The surge can partly be attributed to rapidly rising home prices during the pandemic. The US median home price increased by nearly 40% to $373,253 in the third quarter from $266,861 in the same period in 2019.
The average percentage of deposit as a share of home price also grew. Since 2013, the average annual share of down payment was 11.39%, but that number climbed after the start of COVID to 12.75% and hit 14.71% in the third quarter, suggesting buyers are starting their homeownership with more equity in hand.
Today’s homebuyers have good reasons to bump up their stake in their new homes. For starters, they want to beat out other offers by presenting themselves as less risky buyers.
"When buyers get in multiple bids scenarios, it becomes a safer bet for sellers to pick a buyer who is able to put more down because it's an insurance policy about [the buyers’] financial strength," Jones said.
On top of that, buyers also want to reduce their monthly payment under today’s high mortgage rates and a larger down payment can do that.
For instance, a homebuyer purchasing a $300,000 home with a 10% down payment will have a monthly mortgage of about $1,900 with a 30-year mortgage at 7.57%. Under the same scenario but with a 15% down payment, the monthly payment would be reduced to $1,800.
"It makes a lot of sense that buyers are trying to limit the amount of interest on their loan," Jones said.
A changing buyer pool is another reason for increasing down payments.
Homebuyers who can come up with enough cash to purchase in today’s market are not your traditional buyers. The majority of them are repeat buyers with carryover equity, higher-income households, or ones with access to large down payment.
"Buyers who are participating perhaps have a lot of money, they can put more down from a previous home sale," Jones said. "Otherwise they are not so worried about the budget side of the equation."
"Almost like a biased sample," Jones said.
On average, repeat buyers contributed 17% of the purchase price toward their down payment, whereas first-time buyers put down 6% on average, according to the National Association of Realtors’ 2022 Profile of Homebuyers and Sellers. While repeat buyers have always been the majority of the buyer pool, their share has grown to 75% in 2022 — or nearly three in four buyers. This is a significant growth compared to the historical average of 61.5% from 1981 to 2021.
The number of first-time buyers has shrunk below historical averages, hitting 26% last year — an all-time low. In August, first-time buyers made up only 29% of all sales, well below the long-term average.
Prospective buyers that intend to buy for the first time typically have lower incomes than repeat buyers (the median first-timer reports a household income of $75,000 to $79,999, versus $125,000 to $149,999 for prospective repeat buyers), according to Zillow’s Consumer Housing Trends Report 2023.
"Today's market is so expensive and so challenging to compete in it," Jones said.
Many first-time homebuyers are edged out of today's real estate market as down payments increase. ·urbazon via Getty Images
The same report also shows that the higher the income, the higher the success rate of landing a home purchase. The percentage of successful homebuyers is 42% for households earning $100,000 or more, 27% for households earning $50,000 to $99,999, and 19% for families making less than $50,000.
Some younger homebuyers also are getting a leg up by getting money from family or other loved ones. A recent LendingTree report found that 78% of Gen Z and 54% of millennial homeowners received some type of financial assistance for down payment.
"There's just no getting around how expensive houses are right now," Jacob Channel, LendingTree’s senior economist and report author, told Yahoo Finance. "And because of that there's more incentive for people to say to a parent or somebody like that, 'I'd really like to buy a house but it's so prohibitively expensive, I need some help.'"
These type of buyers are edging out potential first-time buyers who have limited means and a smaller down payment. The share of first-time buyers dropped to 29% in August from 30% a month ago. This is just 3 percentage points higher than November 2022’s tracking at 26%, the lowest level recorded since NAR data collection began.
"We are not seeing that lower side of down payment because those buyers just can't play ball at all," Jones said.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
