Typical Down Payment Drops 10% as Market Cools

SEATTLE – The typical U.S. homebuyer’s down payment fell 10% year-to-year in January. At a median of $42,375 – it’s the lowest level in nearly two years, according to a report from Redfin.

The median down payment is down 35% from the peak it reached in June but still up more than 30% from pre-pandemic levels.

In January, the median down payment equaled 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.

Why are down payments falling?

• The housing market is slow and there’s less competition. Unlike the hyper-competitive housing market of 2021 and early 2022, there are fewer bidding wars. Buyers no longer need a big down payment to prove their stability and stand out from the crowd. Less competition also allows more buyers to use FHA and VA loans, which typically allow smaller down payments.
• High housing costs and inflation. 6%-plus mortgage rates, still-high home prices and inflation hit homebuyers’ pocketbooks hard. Buyers may also be putting more cash toward a mortgage-rate buydown instead of their down payment or hold onto more during uncertain economic times.
• Lower home prices = lower dollar down payments. Home prices remain stubbornly high, but they’ve 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,” says 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.”

Cash sales hits nine-year high

Nearly one-third (32.1%) of U.S. home purchases were paid for with cash in January, up from 29.7% a year earlier. It’s the highest share in nine years. Buyers – especially affluent ones – increasingly pay in cash to avoid 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 more prevalent

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 waned. Most sellers receive 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. More than three-quarters (76.3%) of borrowers used a conventional loan – but that’s the lowest share since June 2020.

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