A Cooling Market Is Pushing Back on High Down Payments

Down payments, something usually necessary for a traditional mortgage, have eased off post-pandemic highs by 10% in January 2023 to an average $42,375 per new origination. The median down payment was down 35% from the peak it reached in June, but still up more than 30% from pre-pandemic levels. 

At January’s levels, the median down payment was equal to 10% of the agreed upon purchase price, down 3.6% year-over-year. Median down payments peaked most recently at 17.5% in May 2022. 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. 

Down payments are falling for several reasons, according to Redfin, who has published their most recent findings:  

  • The housing market is slow and there’s not much competition. Most offers for homes written by Redfin agents don’t face bidding wars anymore. That’s a stark difference from the hyper-competitive housing market of 2021 and early 2022. Buyers no longer need to offer a big down payment to prove their financial stability and stand out from the crowd. Now that buyers often have the upper hand, they can offer an amount that works best for their individual circumstances. Diminished competition is also allowing more buyers to use FHA and VA loans, which typically allow for much smaller down payments. 
  • High housing costs and inflation. 6%-plus mortgage rates, still-high home prices and inflation are hitting homebuyers’ pocketbooks hard. Buyers don’t have as much money to allocate to a down payment because monthly housing payments are higher than before; they may also be putting more cash toward a mortgage-rate buydown instead of their down payment. Additionally, buyers may be inclined to hold onto as much cash as possible in these uncertain economic times. 
  • Lower home prices equal lower dollar down payments. Home prices remain stubbornly high, but they have 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,” said 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. Today’s buyers are also able to save money in other ways: Nearly half of sellers are offering concessions, like helping pay for a mortgage-rate buydown or covering closing costs, to attract buyers.” 

One-third (32.1%) of home purchases were paid in-full with cash in January 2023, up 29.7% year-over-year and stands at its highest rate in nine years. According to Redfin, buyers are choosing to pay in cash to avoid taking on a high-rate mortgage. 

In addition, FHA and VA loans are more prevalent as homeseekers try to find ways to purchase a home in this economy. About 16% mortgaged homes used and FHA loan, up from 13.3% last year at the highest rate seen 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. 

Conventional loans are still by far the most common type. More than three-quarters (76.3%) of borrowers used a conventional loan–but that’s the lowest share since June 2020. 

To read the full report, including charts, methodology and metro-level data, click here. 

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