The price for starter homes grows exponentially as renters' incomes stagnate, making it even more difficult for first-time homebuyers to afford a down payment. However, flexible work options are providing new opportunities for those willing to move to more affordable cities. With low mortgage rates, monthly payments can remain affordable even with a smaller down payment.
Zillow economic data analyst Nicole Bachaud, said, “Without the equity from a previous home sale, first-time home buyers face more challenges in coming up with a down payment. In a housing market where prices are rising at record rates, especially when compared to renter incomes, the ever-increasing sum of a 20% down payment can feel out of reach. The good news is that buyers who want to take advantage of today's low mortgage rates can do so without putting a full 20% down ― most conventional mortgages allow as little as 3% to 5%. That lower upfront payment comes with higher monthly payments, but the opportunity to build equity can outweigh those extra costs for many."
The average renter savings rate is only 2.4%, but even if it were 10%, it would take about six years and five months to save enough for a 20% down payment on today's typical starter home (worth about $148,500). Five years ago, it would have only taken a year to save for a down payment at that rate.
Renters in San Francisco, CA, earn twice as much income than the typical U.S. renter, yet home prices are so high that it would take 17 years and five months (11 years longer than the national average) to afford a 20% down payment on a local starter home.
Despite what some may think, it is possible to secure a mortgage while putting less than 20% down. In fact, a majority (64%) of first-time buyers do so, with one-quarter putting down 5% or less. After three years and three months, renters can save up a 10% down payment on a typical starter home. Typically, accruing a 5% down payment would take only a year and seven months.
However, there are trade-offs to securing a mortgage with a smaller down payment. At today's rates, the mortgage payment on a typical starter home with 20% down would be $501, while a 5% down payment would be $730. Still, this is only 18.9% of a typical renter's monthly income, which is well below the 30% rule of thumb for housing affordability. Buyers also have the benefit of building equity, outweighing the additional cost burden each month.
The Great Reshuffling emerged from the COVID-19 pandemic, as more workers were given the opportunity to work from anywhere they want. This also helps many renters transition to homeownership, since renters in high-cost areas can now save to move to more affordable areas. For example, a renter in Boston could save enough for a 20% down payment on a starter home in Miami in half the time it would take for a local starter home.
More information on the Zillow Consumer Housing Trends Report, click here.
