With the U.S. residential real estate market is in cool-down mode this autumn, home prices remain relatively high – at least from a historical point of view.
According to the Zillow Home Value Index, the average cost of a home in the U.S. in 2022 stands at $344,000. That’s up 20% from 2021.
Yet the average U.S. home down payment is at $62,000, according to data from Lending Tree – and that’s up a hefty 35.3% from September, 2021.
That figure is eating into the nation’s pocketbooks. Across the nation’s 50 largest metros, the average down payment on a home equates to 58.3% of that area’s average yearly household income.
There are, of course, significant disparities in home down payments dependent on where that home stands. Lending Tree reported that California is home to the three metro areas where down payments are highest — San Jose, San Francisco, and Los Angeles. All average down payments in all four urban areas top $100,000.
On the lower end of the scale, Oklahoma City, St. Louis, and Virginia Beach, Va., are the metros with the lowest down payments. Down payments in these metros average $38,169, $40,113 and $40,530, respectively.
"With home prices showing signs of finally coming down, down payments could also start to fall over the coming months,” said LendingTree chief economist Jacob Channel. “With that said, down payments aren’t going to go away for most people, and buyers should still do their best to save as much as they can for a down payment before they set out to buy a home.”
“Remember, the more you save, the easier it often is to get approved for a loan."
Why Are Home Down Payments So Expensive?
Saving $60,000 for a home down payment is no easy task.
Personal finance experts can confirm that.
“It really depends on the buyer's income,” said Compass Real Estate agent Thomas Hollingsworth. “With the median income at approximately $31,000 nationally, it's unlikely that the average earner would be able to afford the monthly payments with current interest rates.”
What’s more likely is that home down payments aren’t coming down anytime soon.
Hollingsworth cites several reasons why down payments are so high.
“Sellers want to make sure buyers can perform,” Hollingsworth said. “Putting 20-plus percent down allows the sellers to feel confident that a low appraisal will not affect the deal due to what many consider hyper-inflated pricing.”
Meanwhile, banks want to ensure they mitigate their risk in case the homeowner defaults on their mortgage in an underwater market. “One way around the banks requiring 20 percent is for the purchaser to buy private mortgage insurance,” Hollingsworth noted.
The down payment figures are also rising because of home appreciation, but that scenario is changing.
“Home values are slowly coming down at roughly 1%-3% per month here in the Maricopa County (Az.) area,” said Reliability in Lending branch manager Deb Gontko Klein. “With values slowly decreasing due to rising rates these down payments will also be lower in the future.”
When mortgage rates drop back down around 5%, homebuyers should see inventory reduce because the demand will again rise with more affordability for all buyers. “It’s supply and demand,” Gontko Klein said. “Prices go down when rates rise and supply rises. Prices of homes will go back up when rates go down and demand rises."
Raising Cash for a Home Down Payment
What can middle-class/average Americans do to raise $62,000 for a home down payment? Start by taking an honest look at your household finances and apply these tips to your saving experience.
- Use your credit cards, but pay them off monthly after the credit reports a balance. “By doing this, you avoid paying interest rates while receiving the benefits to your credit score; the higher the credit score, the more you save,” Hollingsworth said.
- Go over expenses monthly. Take a close look at what monthly recurring subscription services you have. “Also, look how much you’re spending eating out and getting coffee,” Hollingsworth noted. “See where you can cut back.”
- Use a free budget app such as Mint. Set a budget and stick to it. “Then, put as much money as possible in a money market account, and keep your eye on the prize,” Hollingsworth added.
