As home prices decline for the first time in a decade, homebuyers are offering smaller down payments.
Key Details
- Home sales increased for the first time in nearly a year as the average home price declined for the first time in 10 years.
- Previously owned home sales increased 14.5% in February but were still 22.6% lower than a year ago, according to the National Association of Realtors.
- At the same time, homebuyers are contributing less to their down payment on a purchase.
- The typical buyer now places a $42,000 down payment, the lowest number in nearly two years, Axios reports.
- The median down payment is about 10% of the final purchase price. In May 2022, down payments peaked at 17.5%.
Why it’s news
The median home price on existing homes declined 0.2% in February, giving buyers slightly more affordable options. Mortgage rates also fell from 7% in November to 6% in February, though the rates have been volatile in recent weeks.
Higher mortgage rates are a likely contributor to the trend of smaller down payments. Buyers’ money does not stretch as far as it once did, leading to fewer funds for down payments. Additionally, buyers have less competition and do not feel the need to offer a large down payment to set themselves apart from other buyers.
Though home prices declined in February, the slight decline likely will not change the attitude of buyers. Mortgage rates are still high and weigh heavily on a buyer’s mind. High rates mean buyers will have high monthly payments, driving down the cash available for a down payment.
For first-time buyers, smaller down payments may be a good thing. In the competitive housing market over the last few years, first-time buyers with less capital have struggled to compete with repeat buyers. Now the playing field is more even.
The gradual winding down of the housing market over the last year is one result of the Federal Reserve’s aggressive rate hikes. Increased housing prices have been one of the main drivers of inflation, The Wall Street Journal reports.
More financial instability introduced by the collapse of Silicon Valley Bank and Signature Bank may further affect the housing market. However, the recent housing data reflects housing decisions made in December or January as purchases take time to go through.
Recent financial instability may affect the Fed’s decision to raise rates this week. The recent bank failures cause mortgage rates to decline for the first time in six weeks. As a result, home-buying activity will likely increase for a short time, The Wall Street Journal reports.