In a recent report by Redfin, it's revealed that homebuyers are now putting down 15% of the purchase price, a significant increase from 10% just a year ago. The median down payment has surged to $55,640 in February, marking a notable 24.1% rise from $44,850 in the previous year, the largest annual jump since April 2022.
According to Rachel Riva, a Redfin real estate agent in Miami, "Homebuyers are doing whatever they can to pull together a large down payment to lower their monthly payments moving forward." She further noted, "The smallest down payment I’ve seen recently is 25%. I had one client who put down 40%."
Several factors are attributed to this trend. Rising home prices, which have increased by 6.6% year-over-year in February, naturally lead to larger down payments. However, the primary motivation appears to be the ongoing impact of high mortgage rates. By opting for a smaller loan, buyers can significantly reduce their monthly interest payments. For instance, on today’s median-priced US home ($374,500), a 15% down payment could lower the monthly payment by approximately $132 compared to a 10% down payment.
In line with the upward trend in down payments, over one-third (34.5%) of US home purchases in February were made entirely with cash. This figure is just below the decade-high of 34.8% and significantly exceeds the 2013 record of 38%. Cash purchases offer a viable alternative to navigate the challenges posed by high mortgage rates.
Impact on First-Time Buyers
First-time buyers are particularly affected by the competitive market dynamics. They often lack the equity from previous home sales to bolster their down payments, putting them at a disadvantage when competing against all-cash offers, which sellers tend to favor.
Redfin highlighted in the report, "Most buyers can’t afford to pay in cash, and many can’t afford a big down payment either." Chen Zhao, economics research lead at Redfin, further emphasized, "High mortgage rates are widening the wealth gap between people of different races, generations, and income levels."
Closing Thoughts
The surge in down payments and cash purchases underscores the challenges faced by homebuyers in today's market characterized by soaring prices and high mortgage rates. While wealthier Americans may still afford homeownership, others risk missing out on a significant wealth-building opportunity, potentially impacting future generations. As the real estate landscape evolves, it's crucial for buyers to navigate these challenges with informed decisions and strategies.