Full down payments are becoming a relic of the past.
52% of homebuyers nationwide put less than 20% down on their home purchase in 2018, according to the 2018 Zillow Consumer Housing Trends Report.
The remainder either put down 20% exactly to avoid pricey mortgage insurance premiums — 23% of homebuyers — or more than 20% — 20% of homebuyers.
The majority of homebuyers putting down less than 20% are Millennials, which makes sense since this generation of homebuyers largely relies on personal savings for their down payments.
While Zillow does not track historical trends on this issue, the trend toward smaller down payments is reflected in:
- rapidly rising home prices since 2012, far outpacing wage increases;
- reduced personal saving rates; and
- rising mortgage interest rates, which decrease buyer purchasing power.
Small down payments reflect economic times
The U.S. personal savings rate was at its lowest point in over a decade at the end of 2017, at just 2.7% of disposable income. The last time savings were this low was shortly before the 2008 recession hit.
The savings rate jumped during the 2008 recession and again in 2012, but has since trended down. Savings tend to be lowest during times of economic plenty, and highest when consumer confidence in the economy — and thus consumer spending — is low.
In 2018, wages are rising and jobs are nearing a level of full recovery that counts for the interim population increase between the 2008 recession and today. Income-earners feel sufficiently confident in the economy to continue spending money and eschew saving.
As a result, homebuyers lack the savings needed to make a full 20% down payment, meaning the added cost of mortgage insurance and qualifying for lower mortgage balances.
Further, many homebuyers have been unable to save even the minimum 3% down payment, as 30% of homebuyers rely on down payment gifts as a source of funding, according to Zillow.
Still, if history is any indication (and it usually is), savings will rise during the next economic recession, which experts forecast will arrive in 2020. Likewise, the recession will cause lenders to be more cautious, making small down payments less acceptable.
The adjustment to higher down payments will be eased by receding home prices in 2019-2020. Real estate professionals can expect to see slowing sales during these years until the next buyer’s market sets in and homebuyers return, savings in hand, to boost the housing market to its next boom.
