The Typical Down Payment Has Fallen 10% From a Year Ago As Housing Market Cools

Rhea-AI Summary

The typical U.S. homebuyer's down payment fell to $42,375 in January, a 10% year-over-year decline and the lowest in nearly two years, according to a report from Redfin (NASDAQ: RDFN). This marks a 35% decrease from the June peak and is 10% of the purchase price, down from 13.6% a year earlier. The decline is attributed to a slow housing market with reduced competition, high mortgage rates exceeding 6%, and persistent inflation impacting buyer affordability. Notably, nearly 32.1% of purchases were cash transactions, the highest in nine years.

Positive

• Share of cash home purchases increased to 32.1%, indicating strong demand from affluent buyers.
• FHA and VA loans accounted for 16% and 7.5% of mortgaged sales respectively, reflecting expanded access for buyers.

Negative

• Median down payment dropped 10% year-over-year, indicating reduced buyer financial strength.
• High mortgage rates and inflation are straining homebuyers, increasing monthly payments.

The typical U.S. homebuyer made a $42,000 down payment in January, the lowest level in nearly two years, amid rising mortgage rates and low competition

SEATTLE--(BUSINESS WIRE)-- (NASDAQ: RDFN) — 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, according to a new report from Redfin (www.redfin.com), the technology-powered real estate brokerage. The median down payment was down 35% from the peak it reached in June, but 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 the pandemic-era peak of 17.5% in May. The last time down-payment percentages were this low was early 2021, before the pandemic homebuying boom drove buyers to put more money down to make their offers more attractive.

Down payments are falling for several reasons:

• The housing market is slow and there’s not much competition. Most offers for homes written by Redfin agents don’t face bidding wars. That’s a stark 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 individual circumstances. Diminished competition is also allowing more buyers to use FHA and VA loans, which typically allow for much smaller down payments.
• High housing costs and inflation. 6%-plus mortgage rates, still-high home prices and inflation are hitting homebuyers’ pocketbooks hard. Buyers don’t have as much money to allocate to a down payment because monthly housing payments are higher than before; they may also be putting more cash toward a mortgage-rate buydown instead of their down payment. Additionally, buyers may be inclined to hold onto as much cash as possible in these uncertain economic times.
• Lower home prices = lower dollar down payments. Home prices remain stubbornly 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 was 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 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.”

Share of homes bought in cash hits nine-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 affluent 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 out the competition.

FHA, VA loans are more prevalent in today’s slow housing market

Sixteen percent 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. Most sellers are receiving just one offer for their home–a reversal from the hyper-competitive pandemic housing market–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 are still by far the most common type. More than three-quarters (76.3%) of borrowers used a conventional loan–but that’s the lowest share since June 2020.

To read the full report, including charts, methodology and metro-level data, visit: https://www.redfin.com/news/down-payments-decline-all-cash-january-2023/

About Redfin

Redfin (www.redfin.com) is a technology-powered real estate company. We help people find a place to live with brokerage, rentals, lending, title insurance, and renovations services. We also run the country's #1 real estate brokerage site. Our home-buying customers see homes first with on-demand tours, and our lending and title services help them close quickly. Customers selling a home can have our renovations crew fix up their home to sell for top dollar. Our rentals business empowers millions nationwide to find apartments and houses for rent. Customers who buy and sell with Redfin pay a 1% listing fee, less than half of what brokerages commonly charge. Since launching in 2006, we've saved customers more than $1.5 billion in commissions. We serve more than 100 markets across the U.S. and Canada and employ over 5,000 people.

For more information or to contact a local Redfin real estate agent, visit www.redfin.com. To learn about housing market trends and download data, visit the Redfin Data Center. To be added to Redfin's press release distribution list, email press@redfin.com. To view Redfin's press center, click here.

View source version on businesswire.com: https://www.businesswire.com/news/home/20230322005271/en/

Redfin Journalist Services:

Erin Osgood, 206-588-6863

press@redfin.com

Source: Redfin

FAQ

What was the typical down payment for homebuyers in January 2023?

The typical down payment was $42,375, the lowest in nearly two years.

What percentage of home purchases were made with cash in January?

32.1% of home purchases were made with cash, the highest share in nine years.

How have down payment trends changed compared to last year?

Down payments fell by 10% year-over-year, down from 13.6% a year earlier.

What are the main reasons for the decline in down payments?

Declines are due to slow market competition, high mortgage rates, and rising housing costs.

How prevalent were FHA and VA loans in January 2023?

FHA loans made up 16% and VA loans 7.5% of mortgaged home sales, indicating more buyers are utilizing these options.