The typical U.S. homebuyer’s down payment fell 10% year over year in January to $42,375, its lowest level in nearly two years, says a new Redfin report.
The Seattle-based technology-powered real estate brokerage said Wednesday that the median down payment in January dropped 35% from its June peak, but was still up more than 30% from pre-pandemic levels.
The median down payment in January was equal to 10% of the purchase price, down from 13.6% a year earlier and from the pandemic-era peak of 17.5% in May. The last time down-payment percentages were this low was early 2021 before the COVID-19 pandemic homebuying boom drove buyers to put more money down to make their offers more attractive.
Down payments are falling for several reasons, Redfin said, including:
- Lack of competition. Most offers for homes written by Redfin agents don’t face bidding wars, the company said. That’s a dramatic difference from the hyper-competitive housing market of 2021 and early 2022. Buyers no longer need to offer a big down payment to prove their financial stability and stand out from the crowd. Now that buyers often have the upper hand, they can offer an amount that works best for their circumstances. Diminished competition also allows more buyers to use FHA and VA loans, which typically allow for much smaller down payments.
- High housing costs & inflation. With 6%-plus mortgage rates, and home prices and inflation still high, homebuyers’ wallets have been hit hard. Buyers don’t have as much money to allocate for a down payment as last year because monthly housing payments are higher; they may also be putting more cash toward a mortgage-rate buydown instead of the down payment. Buyers also may be inclined to hold onto as much cash as possible because of the recent economic uncertainty.
- Lower home prices. Home prices remain high, but they have fallen more than 10% from their May 2022 peak and 1.5% from a year ago. A 10% down payment on a $400,000 home equals $40,000; if that same home were worth $450,000 in May, the buyer would have needed $45,000 for a 10% down payment.
“One silver lining of high mortgage rates and economic turmoil is that they’ve slowed competition,” said Redfin Senior Economist Sheharyar Bokhari. “That means buyers are often able to purchase a home without facing a bidding war and don’t need to fork over a huge portion of their savings for a down payment to grab sellers’ attention.”
Today’s buyers, Bokhari added, are also able to save money in other ways. “Nearly half of sellers are offering concessions, like helping pay for a mortgage-rate buydown or covering closing costs, to attract buyers,” he said.
Cash Sales Hit 9-Year High
Nearly one-third (32.1%) of U.S. home purchases were paid for with all cash in January, up from 29.7% a year earlier and the highest share in nine years. Buyers — especially wealthy ones — are increasingly paying in cash to avoid taking on a high mortgage rate.
Cash purchases were also common during the homebuying frenzy of 2021 and early 2022, but for a different reason: Buyers back then were offering cash to beat the competition, Redfin said.
FHA, VA loans Increase
Redfin said 16% of mortgaged home sales used an FHA loan in January, up from 13.3% a year earlier and the highest share since April 2020. The share of mortgaged sales using VA loans rose to their highest level in more than two years, climbing to 7.5% from 6.1% a year earlier.
FHA and VA loans, which typically allow for lower down payments than conventional loans, have become more prevalent as the market has cooled and affordability has waned, Redfin said. Most sellers are receiving just one offer for their home, making sellers much more likely to accept FHA and VA loans. Sellers can’t afford to be picky about loan types if they receive just one offer.
Conventional loans, however, are by far still the most common, Redfin said. More than three-quarters (76.3%) of borrowers used a conventional loan, although that’s the lowest share since June 2020.
