One of the biggest burdens for first-time homebuyers is having enough money to make a down payment. And now, they need nearly 25% more than last year to make it happen, as the average home down payment in the U.S. was nearly $56,000 in February, according to a Redfin report released late last week.
“Rising costs definitely make buying a home a much more difficult prospect,” says Brian Mollo, managing director of real estate investment firm Striker Capital and owner of Trusted House Buyers in San Diego, California. Fortune. “Savings are still woefully low in most markets, which means that in most cases finding a down payment is a struggle, and as the amounts needed increase, it only becomes more difficult for the average buyer looking to buy a house.”
The more home prices and mortgage rates rise, the more pressure this puts on homebuyers to put down more money up front. This is to facilitate monthly payments, which are also increasing.
“Over the last couple of years, we’ve been dealing with increases in home mortgage rates, causing huge increases in monthly payments,” says Brian Durham, vice president of risk management and managing broker at Realty Group LLC and Realty Group Premier. Fortune. “One way to offset the monthly payment is to increase your down payment and reduce your financing.”
The Redfin report shows that buyers have been doing just that, increasing their down payment amount to offset future costs. Now, a typical home buyer’s down payment is 15% of the purchase price, up from 10% a year ago. Not only does a larger down payment help the buyer down the road, but it can also be more attractive to sellers choosing from several offers.
“Sellers will sometimes feel that, all other things being equal, the buyer who puts down more money is a stronger buyer financially,” Durham says.
More and more buyers are making all-cash offers
Even as down payment amounts have reached an all-time high, more and more homebuyers are making all-cash offers. According to Redfin, nearly 35% of home purchases were made entirely with cash in February, the highest percentage since the pandemic.
But with home prices so high, how can homebuyers afford to make cash offers? Well, the prospect of having to pay less in the long run is quite attractive, especially as mortgage rates remain high, experts agree.
“With high mortgage rates, many people are choosing to go the cash route to avoid those years of interest payments altogether,” says Seamus Nally, CEO of software company TurboTenant. Fortune. This “obviously means that those transacting in cash are typically those with higher wealth statuses, most likely not young people or first-time homebuyers.”
According to Redfin, first-time home buyers are duly challenged in today’s market because they don’t have the capital from a previous home sale to support the down payment or the ability to make an all-cash offer.
However, “many all-cash offers come from investors, who at the end of last year were buying more than a quarter of the country’s most affordable homes,” Redfin Data reporter Lily Katz wrote in the report last week. “Overall, however, investors are buying far fewer homes than during the pandemic-driven housing boom.”
While there are some signs that the spring housing market may improve slightly with a “trickle” of new listings, it is unlikely that we will see a noticeable difference in down payments, mortgage rates and home prices.
“We will most likely continue to see higher down payments until interest rates drop or we see an increase in new homes being built,” Durham says. “The biggest hole in the market right now is affordable, first-time homes.”