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Down payments are falling because the housing market is slowing and competition is diminishing.
A new report from Redfin showed the average down payment in January 2023 was 10%, down from 13.6% a year ago and well off the pandemic-era peak of 17.5% last May.
They are now similar to levels seen between 2015 and early 2021, before the so-called pandemic home buying boom.
Simply put, today’s home buyers don’t need to come up with a big down payment in order to write a winning offer.
And buyers have been able to access low-down payment options like FHA loans and VA loans again.
Median down payment drops to $42,375 in January 2023
Average down payment by dollar amount Was $42,375 in January, a decline of 10.3% from a year earlier.
The decline is attributed to a lack of bidding wars, less competition, higher borrowing costs (aka mortgage rates), and lower home prices.
Collectively, this has pushed down payments more in line with levels seen before in a COVID-19-fuelled buyer’s market.
Thanks to very high mortgage rates, home prices have come back down to earth. A lower selling price results in a lower down payment.
Home buyers also have less cash to spare because of higher expected monthly housing costs.
And some buyers are using that money to fund the purchase of the mortgage rate, assuming the seller or lender doesn’t cover it.
We’ve also seen a big jump in FHA lending, which sunk to about 10% market share last summer.
It has skyrocketed since mortgage rates doubled, and now sits at around 16%.
Use of VA loans also increased to 7.5% from 6.1% a year earlier, with such loans rising to their highest level in more than two years.
Highest down payment in San Francisco, lowest in Virginia Beach
While down payments fell nationally, there was considerable variation by metro.
Down payments were highest in San Francisco at 25%, while 20% down payments were the norm in places like New York, Los Angeles, Seattle, San Diego, Miami and West Palm Beach.
In contrast, down payments were lowest in Virginia Beach, VA, where the typical home buyer put down only 1.8% of the purchase price.
The reason down payments are so low is because of the high concentration of VA loans that do not require a down payment.
Five other metros, including Atlanta, Baltimore, Detroit, Pittsburgh, and Washington, DC, had a 5% average down payment.
On a year-over-year basis, only two metros saw down payment percentage increases: Newark, New Jersey (12.5% to 19%) and San Francisco (23.3% to 25%).
Meanwhile, they fell the most in Sacramento (20% to 12.4%), Atlanta (10% to 5%), and Orlando (15% to 10%).
All-cash home sales hit 9-year high
All-cash home sales reached their highest point in nine years, despite a drop in average down payments.
According to Redfin, nearly a third (32.1%) of US home purchases were mortgage-free in January, up from 29.7% a year earlier.
It is also easy to explain this trend. People who have the means are forgoing home loans to avoid charging higher mortgage rates.
As mentioned, 30-year fixed mortgage rates have more than doubled since the beginning of 2022, rising from about 3% to 7%.
This has greatly reduced the demand for housing, or put it out of reach for many potential buyers.
But for those who are able to pay in cash, it is possible to get a good discount with prices falling by double digits in some metros. And they can do so without the usual competition.
All-cash buyers were also common in 2021 and early 2022.
Mortgage-free home purchases were most common in West Palm Beach (52.5%), Cleveland (51.5%), and Jacksonville (46.6%).
They were least common in metros like Oakland (13.9%), Seattle (19.7%), and Los Angeles (19.9%), where going all-cash would be a tall order.
The share of all-cash purchased homes increased the most in Cleveland (17.2 points), Riverside, CA (14.8 points), and Baltimore (11 points).
The largest all-cash share declines were seen in Atlanta (-10.7 points), Tampa (-4.5 points), and Charlotte (-4.3 points).
Read more: Do I need to put 20% down on buying a home?
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