Down Payments Are Further from Reach for Home Buyers

Monthly mortgage payments are becoming increasingly affordable for U.S. homeowners as mortgage rates have hit record lows, a new analysis from online real estate company Zillow shows.

But that masks the difficulties would-be buyers face in getting into homes in the first place after extraordinary price growth has pushed prices further above incomes than they’ve been in at least the past several years. 

Homeowner households earning the median income paid 17.5% of their earnings toward a mortgage on the typical U.S. home in September, down from 19.6% two years earlier.

That affordability improvement is thanks to record-low mortgage rates, which have dipped as low as 2.8% this month, down from around 4.85% in October 2018. 

While more affordable monthly payments are a benefit to millions of homeowners nationwide, these rosy statistics obscure the effect of soaring home prices that have outpaced incomes by an alarming level in recent years. 

Saving for a down payment is a massive financial barrier for potential buyers, especially first-time buyers.

More than a quarter of first-time buyers report difficulties saving for a down payment, and 40% of all buyers rely on a gift or loan from family or friends for at least part of their down payment

That hurdle has gotten higher after home values have grown 38.3% since September 2014, while homeowner incomes have grown just less than half that amount (18.8%) over the same period.

A typical U.S. home is now worth more than three times the median annual homeowner income, the highest it’s been since at least 2014, when Zillow’s analysis began. In January 2014, the typical home was worth about 2.6 times the median homeowner income. 

Put another way, we can look at the difference in a 20% down payment over the years. Putting 20% down on the typical home would have taken about $36,600 at the start of 2014, or 6.4 months of income for the median homeowner household.

Now, that would be a roughly $52,000 down payment, which is 7.5 months of income.

Zillow expects the typical U.S. home to appreciate by 7% over the next year, which would bring that down payment up another $3,600 to about $55,600.

Nearly 40% of buyers with a mortgage put at least 20% down, which allows a buyer to avoid private mortgage insurance premiums.

Had pre-pandemic trends held, renters were projected to spend 29.9% of their income on rent in September, the lowest share since at least 2014.

But because renters have been hit hard by income loss during the coronavirus pandemic, it’s likely the share is considerably higher.

The spread between rent and mortgage affordability illustrates the financial benefits of homeownership — the ability to build equity, often while also spending relatively less on monthly housing payments, is a key avenue for building long-term wealth. 

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