It’s harder to save for a down payment, but today’s first-time buyers have unique opportunities


  • Today, first-time buyers need a year longer to save for a 20% down payment than they did five years ago.
  • Renters will need to save an additional $ 369 per month over the coming year just to keep up with the expected growth in home values.
  • Most first-time buyers pay less than 20%, but today’s low mortgage rates mean monthly payments can stay affordable with a smaller down payment.

American renters earning the typical tenant income and saving at the typical tenant rate should expect it to take over a quarter of a century to save for a 20% down payment on the typical American starter home – and the lead time may be even longer for many colored tenants.

The time it takes to save a proper down payment has increased over the past few years, and tinkering with a down payment remains the biggest hurdle most buyers will face on their way to home ownership. But there are a few silver liners unique to the market today that give first-time homebuyers a few advantages, according to a Zillow analysis of home values ​​and income. More aggressive saving and / or a smaller down payment (buyers can pay as little as 3% in many cases) can significantly reduce savings time. The increased opportunities for remote work can open up more affordable areas, and ultra-low mortgage interest rates can make the monthly payment manageable once the down payment is secured.

According to the 2020 Zillow Group Consumer Housing Trends report, about two-thirds (64%) of first-time buyers put less than 20% off their first home, and a quarter put 5% or less. Less than half of first-time buyers reported saving the majority of their down payments on their own, meaning that the rest used other means, including gifts and loans from family and friends or drawing on funds. retirement accounts and investments to establish their down payments. But not everyone has these opportunities. Black and Latin homebuyers were more likely to say they had saved at least some of their down payments themselves compared to white homebuyers, illustrating some of the disparities in how households save for their American Dream. .

Saving is really the only option for first-time buyers without the luxury of relying on freebies and investments for a down payment, and it gets harder and harder as home prices skyrocket. For renters whose median renter income in the United States (as of March 2021) is $ 3,855 per month and 2.4% of their income in savings (the median rate for renters), it will take 26.8 years to save for a 20% down payment on a typical starter home today, priced at $ 148,527. That number sounds high, and it is, but the good news is that 20% is not required. The down payment on most conventional loans can be as low as 3%, reducing the time it takes to save for a proper down payment on a typical entry-level home under the same assumptions to just under 4 years.

For renters who are willing to be more aggressive with their savings, we estimated how long it would take assuming they were saving 10% of their income. For a 20% down payment on a typical start-up home, it would take 6.4 years at a 10% savings rate (up almost exactly a year from the time it would have taken in 2016) and less one year, about 11.5 months, to save up to a 3% down payment.

But these are national medians, and there are huge variations in the time it takes to save for down payments across the country. In the notoriously expensive city of San Francisco, it takes the typical tenant saving 2.4% of their income 72.6 years to save a 20% down payment on the local starter house, even if tenant incomes are more than two. times higher than the national median. If Bay Area tenants save 10% of their income, it would take them another 17.4 years to raise a 20% down payment. But in places like Birmingham, AL, tenants saving 10% of their income can get a 20% down payment on the local starter house in as little as 4.7 years, and a 3% down payment in less than 9 months. .

Opportunities and Tradeoffs

And for many, the ability to work remotely has opened the doors to homeownership – part of what Zillow calls the big reshuffle. In this scenario, those who can’t afford a down payment in San Francisco might be able to afford it elsewhere. A typical San Francisco tenant, if he is able to do his job remotely, could save enough for a 20% down payment on a startup home in Austin in about six years and eight months, and a similar home in Phoenix in. five years and seven months. A similar tenant in Boston could save enough for a 20% down payment on a Miami startup home in half the time it would take for a local startup home – 6.5 years, instead of 13 years. On the other hand, a typical Austin tenant wishing to move to San Francisco would have to save for 28 years and three months.

Tenants of color looking to own property may be in the best position to take advantage of increased flexibility of working from home – which is a good thing, because the rules of the game are already not level for these communities. Many black and Latin renters often start the home buying process at a disadvantage, with lower median incomes and lower incomes resulting in years of longer savings. Black and Latino renters will take 40.1 and 31.8 years, respectively, to save a 20% down payment on a typical American starter home at a savings rate of 2.4%, compared to white renters who could save. this sum in 25.3 years and to Asian tenants who could save this sum in 18.6 years. The longer time it takes for tenants of color to save for a down payment, as well as other structural hurdles including lack of access to credit and mortgage refusal, are just a few of the reasons why the median age of black and Latin owners is increasing over time compared to the median age of white owners.

And while it’s true that not all buyers need to put down a 20% down payment, and many can get a mortgage with as little as 3% down, there is a trade-off. A smaller down payment means a larger monthly mortgage payment, especially with the introduction of mortgage insurance required by many lenders when the down payment is less than 20%. Still, the benefits of owning and gaining equity in a home could outweigh the costs – and even more so in a booming market like today where homes are appreciating at record rates. . It is important for buyers to consider the evolution of monthly payments with different down payment options. The monthly payment on a typical American starter home with a 20% down payment would be $ 709; at a 3% down payment, the monthly payment is $ 953.

Look ahead

One final wrinkle: this is all based on current income and home values. But the growth in starter house prices has quickly outpaced the growth in tenant income since before the pandemic, and currently starter homes are increasing in value at nearly 7 times the monthly rate of growth in tenant income ( start-up increase by 1.8% per month, compared to 0.26% for tenant income). This means that it will take a lot more for tenants today to save for the homes of tomorrow. The typical, median American home – more expensive than starting homes – is expected to increase 14.9% in value by the same time period next year. And because starting homes have increased in value faster than mid-tier homes, we’re likely to see equally high or even higher value growth for the low end of the market, which means tenants will need to save. even more just to stay afloat.

Renters who save at the median savings rate of 2.4% of renters are currently saving about $ 92 / month. To account for a 14.9% price increase over the next year (or, again, potentially more), an additional $ 369 per month needs to be saved on top of the current savings, or roughly 4 times the actual level. And since many tenants were seriously affected pandemic and are still struggling to get back on their feet, saving for the future may not be an immediate priority.

The result is that Without equity from a previous home sale, first-time homebuyers face more difficulty making down payments than regular homebuyers. In a housing market where prices are rising at record rates, especially relative to tenant incomes, the ever-growing sum of a 20% down payment may seem out of reach. The good news is that buyers who want to take advantage of today’s low mortgage rates can do so without putting in a full 20% discount – most conventional mortgages allow as little as 3-5%. This lower upfront payment comes with higher monthly payments, but the ability to build up equity can outweigh those additional costs for many. Additionally, the opportunities to work from home and potentially move to a more affordable location as part of the Big Shuffle could allow more potential buyers to save more quickly for their share of the American Dream.

About Matthew R. Dailey

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