The rising cost of living is posing a barrier for buyers to afford larger down payments.
The typical U.S. homebuyer who took out a mortgage in July made a $62,500 down payment, up 13.6% year over year, according to a new Redfin report. That number is nearly twice the median down payment — $32,917 — recorded in July 2019, before the pandemic.
However, down payments have subsided in recent months after peaking at $66,000 in May and June. The decline is attributed to a cooling market, despite months of high mortgage rates and inflation.
The rising costs of monthly mortgage payments, goods, and services are cutting into buyers’ budgets, making it harder to afford huge down payments, Redfin said. The silver lining is that a slower housing market also means less competition for homes, which means buyers don’t necessarily need to offer large down payments.
The average buyer’s down payment in July was equal to 15.2% of the purchase price, essentially unwavering from 15% a year earlier but up from 10% before the pandemic. The typical down-payment percentage hit a nine-year high in May, reaching 18% of a home’s purchase price, before the housing market cooled considerably during the late spring and early summer.
Redfin reported that roughly six in 10 (58.7%) buyers who used a mortgage had a 10%-plus down payment, up slightly from 57.5% a year earlier and up from the 50% range before the pandemic.
Remote work options and record-low mortgage rates led many Americans to buy homes during the pandemic and even relocate, causing prices and competition to reach all-time highs. Although prices are falling from their peak, they’re still near record highs.
“Homebuyers 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.”
Where Are Markets The Hottest?
Three of the five metros where down payments increased most in July from a year earlier are in New York or New Jersey. The average down payment was $64,250 in Nashville, Tenn., in July, up 39.7% from a year earlier. Nashville’s data is the biggest increase of the metros in Redfin’s analysis.
Conversely, down payments fell from a year ago or stayed the same in seven of the 40 metros in Redfin’s analysis, mostly in California. The typical down payment was $55,000 in Riverside, Calif., down 15.4% year over year, the biggest decline of the metros in the analysis. Next was San Francisco, where the typical down payment of $364,000 was down 7.8% year over year.
By percentage, down payments increased most in Denver. The typical Denver homebuyer made a 20% down payment in July, slightly 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.
