Why down payments are rising
Several factors are driving this trend. Rising home prices (up 6.6% year-over-year in February) naturally lead to larger down payments. However, the primary motivation seems to be the ongoing impact of high mortgage rates.
By taking out a smaller loan, buyers reduce their monthly interest payments. For example, on today’s median-priced US home ($374,500), a 15% down payment lowers the monthly payment by roughly $132 compared to a 10% down payment.
Cash purchases on the rise
Mirroring the down payment trend, over one-third (34.5%) of US home purchases in February were made entirely with cash. This is just below the decade-high of 34.8% and significantly above the 2013 record of 38%. Like larger down payments, cash purchases offer a way to circumvent the burden of high mortgage rates.
First-time buyers are particularly affected by the competitive market, as they often lack the equity from previous home sales to bolster their down payments. Many first-time buyers are competing against all-cash offers, which sellers favor.
“Most buyers, though, can’t afford to pay in cash, and many can’t afford a big down payment either,” Redfin said in the report. “First-time buyers, especially, are at a disadvantage in today’s market. That’s because they don’t have equity from the sale of a previous home to bolster their down payments and are often competing against all-cash offers, which sellers tend to favor. Many all-cash offers come from investors, who were buying up more than one-quarter of the country’s low-priced homes as of the end of last year.”