BLOG~VLOG

20% Down: Gone but not forgotten?

Prior to the early 1980's, finding a residential mortgage without enough resources for a 20 percent down payment was next to impossible. In today's market, paying 20 percent of the home's price up front is the exception rather than the rule. A research study by the National Association of Realtors reveals just how distinctly the status quo has changed.

How Buyers Pay for their Homes

In a national real estate profile, NAR surveyed thousands of consumers who purchased a home from July 2005 through June 2006. The vast majority of home-buyers finance at least part of their home purchase. According to the survey, 92 percent of homebuyers in 2006 reported that they financed some portion of the home's closing price. This does not represent much of a departure from historical trends, as "all-cash" buyers typically represent a small share of the real estate market.

What is surprising is how much of the purchase price the average home buyer financed in 2006. The average home buyer financed 91 percent of the home's purchase price. That means the average down payment overall was just 9%.

First Time Buyers vs. Repeat Buyers

The average repeat home buyer in 2006 financed 84 percent of the home's price. Of all repeat buyers, 10 percent opted to finance the entire cost of the home, with no money down. 62 percent of repeat buyers said they used proceeds from the sale of a primary residence to pay for the down payment. 40 percent cited the use of savings account funds.

On average, first time buyers financed an even larger portion of the home's price tag - the average first time buyer financed 98 percent of the home's purchase price (an average down payment of 2%!). Four out of ten first time home buyers chose to finance the entire amount of the home. 73 percent of first time buyers reported that savings were a source of funding for down payments.

Why Down Payments Are Shrinking

Why has the size of the average down payment (relative to the overall closing price) dropped so precipitously, especially among first time buyers? The easiest explanation is the rising cost of home ownership. According to NAR's Housing Affordability Index for November 2006, the Median price of an existing single-family home was $217,200. In many regions average home prices have risen at a rate far greater than that of average income. In many cases the average homebuyer cannot afford to pay for 20 percent of the typical home up front.

Over the last two decades the mortgage industry has begun offering consumers a much wider variety of financing options, in part to help home buyers bridge the affordability gap, but also as a means of encouraging more consumers to become home owners. Where once the only game in town were mortgages based upon a 20 percent down payment, today's buyers can choose from a range of 90 percent, 95 percent and 100 percent financing options as alternatives. The prevalence of these "minimal-down" or "no-down" mortgage products is a major reason that large down payments are no longer as pivotal as they once were.

Implications

In years past, buyers who chose low down payments or who forwent the down payment entirely had less to worry about, because consistent, rapid appreciation helped offset the risk of financing the entire home's worth. As appreciation slows in many markets, that often is no longer the case. Buyers who opt for low-down or no-down payment structures can run the risk of not building equity over the short term if the home's value does not increase.