To afford a monthly mortgage payment, middle-class Americans need to put more than $127,000 down

Rhea-AI Summary

A new analysis by Zillow reveals that to comfortably afford a typical U.S. home, a buyer earning the median income needs to put down $127,750, or 35.4%. This is significantly higher than five years ago when no down payment was necessary due to lower home values and mortgage rates. This increase highlights how the pandemic and rising mortgage rates have affected housing affordability. Around 43% of last year's buyers used financial gifts for their down payments, the highest since 2018. While many U.S. markets remain unaffordable, places like Pittsburgh offer more accessible housing options without a significant down payment.

Positive

• Pittsburgh offers the most affordable housing, with no down payment needed.
• Down payment assistance programs are available nationwide, with over 2,373 programs.
• In Minneapolis, down payment assistance can reduce the required down payment from 27% to 21%.

Negative

• A median-income household now needs to put down $127,750 to afford a typical U.S. home.
• Home values and mortgage rates have significantly increased over the past five years.
• In Los Angeles, a median-income household needs an 81.1% down payment to afford a typical home.
• San Jose requires over $1.3 million down payment, more than the home value in other major markets.
• High mortgage rates have led to decreased housing affordability and increased competition among buyers.

Insights

Financial Analyst

Financial implications of the article are profound. The rise in down payment requirements to about $127,750 for a median-income household significantly impacts affordability. Investors should note that a 35.4% required down payment compared to no down payment five years ago depicts a stark change in the housing market dynamics. This shift can lead to decreased demand for housing as potential buyers are priced out, which could cause a softening in housing prices over the long term. Also, increased reliance on family gifts or assistance programs for down payments, as mentioned in the article, points to increased financial stress on homebuyers.

Moreover, the variation in affordability across different metropolitan areas can influence population movement trends, with potential for investors to seek opportunities in more affordable markets like Pittsburgh or avoid high-cost areas like San Jose. Long-term implications might include a shift in demand towards rental properties and multifamily units as homeownership becomes less attainable.

The high down payment requirements in markets like California justify observed population losses and could signal a continued trend unless affordability improves. Investors should consider the potential impact on related sectors such as construction, real estate services and consumer finance.

Market Research Analyst

The market shifts highlighted in the article suggest that the pandemic's impact has created a structural change in housing affordability. The data shows an increased need for down payment assistance programs, which indicates a possible growth area for financial services companies providing such products. Analyzing market-specific data, affordability in cities like Pittsburgh contrasts sharply with cities like Los Angeles and San Jose, affecting local economies differently.

For a retail investor, understanding these local market dynamics is crucial. For example, investing in markets where homes are still affordable with lower down payments might be more promising. In contrast, markets with high down payment requirements could face declining demand or a shift towards rental markets, affecting property values and investment opportunities.

Additionally, the increased time needed to save for a down payment (up to 12 years) in typical markets suggests potential growth in savings and investment products aimed at helping prospective buyers accumulate necessary funds. Investors should monitor demographic shifts and how they influence the housing markets across different regions.

Forty-three percent of last year's home buyers used a gift from family or friends to help with their down payment, the most since at least 2018

• A median-income household would need to put 35.4% down to afford the payments on a typical U.S. home.
• Five years ago, the typical U.S. home would have been affordable to a median-income household with no money down.
• A typical home is affordable to a median-income household with 20% down or less in 10 of the 50 biggest U.S. markets.

SEATTLE, June 20, 2024 /PRNewswire/ -- To comfortably afford a typical U.S. home, a home buyer making the median income needs to put down nearly $127,750, or 35.4%, a new Zillow® analysis shows. Five years ago, when mortgage rates were hovering just above 4% and the typical home was worth about 50% less, that home would have been affordable with no money down.

That $127,750 down payment is what a household making the median income would need to put down when purchasing a typical U.S. home — valued at about $360,000 — so that the monthly mortgage payments take up no more than 30% of that household's monthly income.¹

The enormous gap between the down payment needed now and five years ago underscores how the pandemic fueled a scorching-hot housing market, and why the rise in mortgage rates in the time since has cooled the market. Stubbornly high mortgage rates have pushed both buyers and sellers to the sidelines. With so few homes for sale, competition is stiff among the remaining buyers.

"Down payments have always been important, but even more so today. With so few available, buyers may have to wait even longer for the right home to hit the market, especially now that buyers can afford less. Mortgage rate movements during that time could make the difference between affording that home and not," said Skylar Olsen, chief economist at Zillow. "Saving enough is a tall task without outside help — a gift from family or perhaps a stock windfall. To make the finances work, some folks are making a big move across the country, co-buying or buying a home with an extra room to rent out. Down payment assistance is another great resource that is too often overlooked."

To save up $127,750, it would take a household making the median income about 12 years (assuming its members save 10% of their income each month with a 4% annual return). It's no wonder then that 43% of last year's buyers used a gift from family or friends for at least part of their down payment, the highest share since at least 2018.

There are still affordable pockets of the U.S. In 10 major metropolitan areas, the typical home is affordable to a median-income household with less than 20% down. Pittsburgh boasts the most affordable housing market. A median-income household there could afford the monthly payments on a typical home even with no money down.

California is on the other end of the affordability spectrum. A median-income household in San Jose would need to put down more than $1.3 million to afford the mortgage payments on a typical home — that's more than the typical home is worth in every other major market. In Los Angeles, a median-income household would need an 81.1% down payment ($780,203) to afford the typical home, the highest in the country. This helps explain why many California metros have seen population losses since 2020, as long-distance movers target areas with more affordable housing.

For those who qualify, down payment assistance can amplify savings and help a buyer enter homeownership more quickly. In Minneapolis, for example, the average amount of down payment assistance available across the metro is just under $22,750, according to data from Down Payment Resource. A median-income buyer in Minneapolis without down payment assistance would need a 27% down payment to comfortably afford the typical home. With $22,750 in down payment assistance, they would need to put 21% down.

"Homeownership is the primary source of net worth and generational wealth for most Americans, and declining affordability is making it harder for average earners to get their foot in the door of an entry-level home. Luckily, 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," said Down Payment Resource Founder and CEO Rob Chrane. "In fact, down payment assistance providers have responded to the difficult housing market by increasing the number of programs offered and expanding inventory options with support for manufactured homes and owner-occupied multi-unit homes."

Every for-sale listing on Zillow displays available down payment assistance programs that a buyer may qualify for.

Metro Area*	Typical Home Value	Down Payment Needed ($)	Down Payment Needed (%)	Years to Save**	Average Down Payment Assistance***
United States	$360,681	$127,743	35.4 %	12.0	~$17,000
New York, NY	$657,279	$494,795	75.3 %	27.4	$23,660
Los Angeles, CA	$962,388	$780,203	81.1 %	36.3	$42,446
Chicago, IL	$321,897	$95,953	29.8 %	8.8	$9,811
Dallas, TX	$381,104	$152,586	40.0 %	12.9	$12,670
Houston, TX	$310,707	$76,825	24.7 %	7.9	$10,618
Washington, DC	$568,862	$188,087	33.1 %	11.2	$20,161
Philadelphia, PA	$362,204	$103,471	28.6 %	9.2	$12,690
Miami, FL	$490,088	$316,270	64.5 %	24.1	$20,623
Atlanta, GA	$387,471	$118,239	30.5 %	10.1	$10,796
Boston, MA	$701,349	$432,875	61.7 %	23.1	$28,359
Phoenix, AZ	$461,352	$186,012	40.3 %	14.8	$21,444
San Francisco, CA	$1,183,272	$887,656	75.0 %	31.5	$58,035
Riverside, CA	$584,710	$358,926	61.4 %	23.6	$32,312
Detroit, MI	$254,325	$24,132	9.5 %	2.8	$11,479
Seattle, WA	$753,414	$462,095	61.3 %	23.7	$26,533
Minneapolis, MN	$378,924	$102,199	27.0 %	8.6	$22,738
San Diego, CA	$958,266	$723,527	75.5 %	32.5	$41,377
Tampa, FL	$382,802	$181,195	47.3 %	16.6	$14,414
Denver, CO	$595,649	$300,970	50.5 %	18.7	N/A
Baltimore, MD	$387,914	$100,641	25.9 %	8.5	$9,910
St. Louis, MO	$253,559	$10,773	4.2 %	1.2	$8,315
Orlando, FL	$398,881	$192,533	48.3 %	17.0	$16,755
Charlotte, NC	$386,371	$149,041	38.6 %	13.7	$12,372
San Antonio, TX	$289,511	$92,158	31.8 %	9.7	$11,885
Portland, OR	$556,385	$296,427	53.3 %	19.8	$27,560
Sacramento, CA	$586,875	$337,769	57.6 %	21.7	$29,044
Pittsburgh, PA	$217,285	$0	0 %	0	$8,157
Cincinnati, OH	$287,721	$59,573	20.7 %	6.4	$10,711
Austin, TX	$466,628	$209,333	44.9 %	14.7	$15,303
Las Vegas, NV	$427,509	$198,306	46.4 %	17.6	$18,479
Kansas City, MO	$307,032	$76,273	24.8 %	7.9	$11,526
Columbus, OH	$315,438	$84,215	26.7 %	8.5	$12,357
Indianapolis, IN	$282,396	$27,570	9.8 %	3.1	$10,967
Cleveland, OH	$230,536	$31,551	13.7 %	4.0	$9,524
San Jose, CA	$1,631,252	$1,320,275	80.9 %	36.2	$63,407
Nashville, TN	$446,180	$203,325	45.6 %	16.7	$17,620
Virginia Beach, VA	$351,095	$112,962	32.2 %	10.9	$10,217
Providence, RI	$481,911	$257,453	53.4 %	19.0	$22,792
Jacksonville, FL	$361,796	$116,974	32.3 %	10.8	$12,700
Milwaukee, WI	$348,439	$137,086	39.3 %	13.4	$10,483
Oklahoma City, OK	$235,815	$31,331	13.3 %	3.9	$9,442
Raleigh, NC	$449,514	$152,410	33.9 %	11.8	$16,814
Memphis, TN	$242,519	$30,852	12.7 %	4.1	$9,075
Richmond, VA	$372,080	$105,228	28.3 %	9.6	$10,896
Louisville, KY	$258,557	$46,869	18.1 %	5.7	$10,935
New Orleans, LA	$241,940	$46,138	19.1 %	6.0	$12,998
Salt Lake City, UT	$549,373	$251,131	45.7 %	17.1	$19,751
Hartford, CT	$362,763	$129,585	35.7 %	11.0	N/A
Buffalo, NY	$262,616	N/A	N/A	N/A	$14,273
Birmingham, AL	$255,033	$19,406	7.6 %	2.4	N/A

	*Table ordered by market size
	**Assuming a household saves 10% of its income each month with a 4% annual return
	***Source: Down Payment Resource. The average amount of down payment assistance that a qualified household could receive for the purchase of a starter home.

 

About Zillow Group
Zillow Group, Inc. (Nasdaq: Z and ZG) is reimagining real estate to make home a reality for more and more people. As the most visited real estate website in the United States, Zillow and its affiliates help people find and get the home they want by connecting them with digital solutions, dedicated partners and agents, and easier buying, selling, financing and renting experiences.

Zillow Group's affiliates, subsidiaries and brands include Zillow®, Zillow Premier Agent®, Zillow Home Loans℠, Trulia®, Out East®, StreetEasy®, HotPads®, ShowingTime+℠, Spruce® and Follow Up Boss®.

All marks herein are owned by MFTB Holdco, Inc., a Zillow affiliate. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org). © 2024 MFTB Holdco, Inc., a Zillow affiliate.

¹Estimated monthly mortgage payments include principal and interest based on the typical home value according to the Zillow Home Value Index and prevailing mortgage rates according to Freddie Mac, plus estimates for property taxes, homeowners' insurance and maintenance.

 

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SOURCE Zillow

FAQ

Why do median-income buyers need a $127,750 down payment for a typical U.S. home?

Due to increased home values and mortgage rates, a median-income household must now put down $127,750 to afford a typical U.S. home.

What percentage of last year's home buyers used financial gifts for down payments?

About 43% of last year's home buyers used financial gifts from family or friends to help with their down payments.

Which U.S. city has the most affordable housing market?

Pittsburgh boasts the most affordable housing market where a median-income household can afford a home with no down payment.

How much down payment assistance is available in Minneapolis?

In Minneapolis, down payment assistance averages just under $22,750, reducing the required down payment for median-income buyers from 27% to 21%.

Why has the need for down payments increased in recent years?

The need for increased down payments is due to the pandemic-fueled rise in home values and higher mortgage rates.

How much down payment is needed for a typical home in Los Angeles?

A median-income household in Los Angeles needs a down payment of 81.1%, or $780,203, to afford a typical home.

What challenges do high mortgage rates pose for home buyers?

High mortgage rates reduce affordability and increase competition among the number of buyers who can still enter the market.

How long would it take a median-income household to save for a $127,750 down payment?

It would take a median-income household about 12 years to save $127,750, assuming they save 10% of their income each month with a 4% annual return.

What are some solutions for buyers struggling with high down payments?

Solutions include receiving financial gifts, relocating to areas with more affordable housing, co-buying, renting out extra rooms, and using down payment assistance programs.