To comfortably purchase a typical U.S. home, a middle-income homebuyer would need to put down about $127,750, or 35.4%, according to real estate market analysis by Zillow (Nasdaq: Z and ZG).
Five years ago, when mortgage rates “were hovering just above 4% and the typical home was worth about 50% less, the home would have been affordable with no down payment,” Zillow's update noted.
Real Estate Update noted that a down payment of $127,750 is “the amount that an average-income household would need to pay to purchase a typical U.S. home, worth about $360,000, so that their monthly mortgage payments would be less than 30 percent of that household's monthly income.”
“The huge difference in down payments needed now versus five years ago highlights how the pandemic created excitement in the housing market and why rising mortgage rates subsequently cooled it.”
“Mortgage rates remain high, keeping both buyers and sellers on the sidelines,” according to the latest U.S. real estate market report.
With so few homes for sale, competition among remaining buyers is fierce.
“The housing market is changing rapidly,” said Skyler Olsen, chief economist at Zillow.
“Down payments have always been important, but they're even more important today. With a limited supply of housing, buyers may have to wait longer for the right home to come on the market, especially now when buyers have less money to pay. How mortgage rates move in the meantime may determine whether you can afford the home. Without outside help, like gifts from family or a sudden rise in the stock market, it can be hard to save enough. To make finances work, some people move across the country, buying homes with co-ops or extra rooms to rent. Down payment assistance is another great resource that's often overlooked.”
It would take an average-income household about 12 years to save $127,750 (assuming household members save 10% of their income each month at a 4% annual return).
“It's no wonder that 43% of buyers last year used gifts from family and friends for at least part of their down payment — the highest percentage since at least 2018.”
There are still affordable areas in the US
In the 10 largest metropolitan areas, a typical home is “affordable for a moderate-income household with less than a 20% down payment.”
Pittsburgh boasts one of the most affordable housing markets, with median-income families there being able to afford the average monthly payment for a home without a down payment.
California sits at the other end of the affordability spectrum.
The median-income household in San Jose “would have to fork out more than $1.3 million to cover the mortgage payment on a typical home, which is more than the value of a typical home in every other major market.”
In Los Angeles, the median income household “needs a down payment of 81.1 percent ($780,203) to purchase a typical home, the highest in the country.”
This helps explain why many urban areas in California have “shrunk in population since 2020 as long-distance migrants target areas with more affordable housing.”
For those who qualify, down payment assistance “can help build savings and get buyers closer to homeownership sooner.”
In Minneapolis, for example, “the average amount of down payment assistance available citywide is just under $22,750, according to data from Down Payment Resources.”
A middle-income buyer in Minneapolis “would need 27% down payment to comfortably buy a typical home without down payment assistance. With $22,750 in down payment assistance, they'd need to put down 21%.”
“Down Payment Resource is a game changer,” said Rob Chrane, founder and CEO of Down Payment Resource.
“Homeownership is the primary source of net worth and generational wealth for most Americans, and declining home affordability is making it harder for people with average incomes to purchase an entry-level home. Fortunately, there are more than 2,373 down payment assistance programs nationwide, with at least one program in every county and 10 or more programs available in 2,000 counties. In fact, down payment assistance providers are responding to the challenging housing market by increasing the number of programs offered and expanding inventory options with support for manufactured homes and owner-occupied multi-unit homes.”