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After a steady rise in buyers kicking in ever larger down payments in an attempt to win heated bidding wars over the past few years, down payments are now shifting—and shrinking.
The housing market is seeing an overall decline in down payments for the first time since the second quarter of 2020, according to a new report from Realtor.com®. Buyers likely don’t have that extra cash lying around as they face stubbornly high home prices, higher mortgage interest rates, and rising inflation. And many have already burned through the COVID-19 stimulus payments that helped millions of Americans save up.
The average down payment slipped to 13% in the first three months of this year, down from the peak of 14.1% in the second quarter of 2022.
“Today’s buyers don’t have much flexibility as the high cost of homeownership puts more pressure on already tight budgets,” says Hannah Jones, an economic data analyst at Realtor.com.
(The report analyzed down payment data in dollars and as a percentage of the purchase price of homes at the national, state, and metropolitan area levels. Only the 100 largest metros were considered. The down payment information comes from Optimal Blue mortgage data, and the sales prices come from CoreLogic data. Metros include the central city and surrounding towns, suburbs, and smaller urban areas.)
A slight drop in the percentage might not seem significant at first glance until the extreme rise in home prices is factored in. In the past three years, the median home list price jumped nearly 35%, according to April Realtor.com data. The larger the purchase price, the bigger the down payment.
The median down payment dollar amount was 71.8% higher in the first quarter of this year than in the first quarter of 2020, when the pandemic was just beginning. Down payments rose from an average of $14,000 in the first quarter of 2020, just before the pandemic turbocharged the housing market, to $24,100 in the first three months of 2023.
Now that the housing market has slowed, buyers in certain markets are finding they can once again have an offer accepted when putting less down.
So where have down payments fallen the most? And where are homebuyers still willing to part with a significant amount of money to secure a desirable home? Here’s a look at where smaller down payments are the norm and the markets where a down payment is still pushing upward.
Where down payments have fallen the most
The dip in down payments is most pronounced in the pandemic boomtowns of years past.
Ohio had two entries among the top five metros where down payments declined the most in relation to purchase price: Dayton (down 3.8% in 2023 year over year) and Columbus (down 1.9% in 2023 year over year). And this is despite Ohio being a desirable state among homebuyers when it comes to affordable homes.
That an area boasts lower home prices doesn’t mean down payment money will appear out of nowhere.
“Ultimately, buyers cannot put down more money than they have saved as a down payment,” says Jones.
The three other top metros that saw a decline in down payments are Boise, ID, at -2.9%, Austin, TX, at -1.7%, and El Paso, TX, at -1.7%.
Some of these down payment decreases can also be chalked up to the cooling in the housing market. As it’s become a little less competitive, more buyers are using Veterans Affairs home loans, which require zero down, and other government-backed loans that allow lower down payments.
“There has been an uptick in accepted offers with government-back loans, including FHA and VA loans,” says Kelly McCormick, president-elect of the Dayton Board of Realtors. “Smaller down payments are associated with these loans.”
Where down payment percentages rose
Meanwhile, down payments are rising in many smaller, less expensive cities in the Northeast. They went up the most in Syracuse, NY, at 3% year over year, followed by Allentown, PA, at 2.6%, and Richmond, VA, at 2.1%.
“These affordable places are attracting buyers from larger, more expensive markets who can put down more as a down payment to either reduce their loan amount or to compete,” says Jones.
However, higher percentages don’t always equal more money. Homes on the coasts are still a hot commodity, so buyers are often putting down more to purchase them.
Buyers in Silicon Valley’s San Jose, CA, put down the most, at a whopping median of $246,000 in the first quarter of this year! There were hefty down payments in San Francisco, at $159,000, and Los Angeles, at $115,000, as well. Over on the East Coast, Boston had a median $96,000 down payment, and New York City rounded out the list with a median $74,000 down payment.
Buyers in these areas tend to be wealthier and have the means to put down more (which will ultimately mean they’ll pay less in mortgage interest).
How much should homebuyers put down?
So how does the average homebuyer interpret this down payment data?
The gold standard of down payments has long been 20%. Buyers who contribute that much don’t have to pay costly private mortgage insurance. But many buyers don’t have that kind of cash.
Before the pandemic, many buyers would turn to government-backed mortgages that allowed them to put down as little as 3% or 3.5% depending on the loan. Now that the housing market isn’t as competitive as it was, those loans are becoming more popular again.
“Buyers have a few levers to pull when deciding how to finance a home,” says Jones. “Based on the market they are buying into, home shoppers should determine the size of home payment they are comfortable taking on.”
And to make the right decision about down payment size, buyers need to carefully evaluate local home prices, current mortgage rates, and competition in the area.
Putting down less money upfront means buyers will have a larger loan to pay off, yet they will have money in the bank for emergencies or unseen home repairs.
But if buyers really want to win a bidding war, they might have to dig deep.
“In a highly competitive market, a buyer may offer more as a down payment to compete in a multiple-bid scenario,” says Jones.
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