Illustration by Realtor.com; Source: Getty Images (2)
Higher home prices and mortgage rates aren’t the only rising numbers in the housing market since the COVID-19 pandemic turned everything on its head.
The average down payment for a median-priced home also rose from pre-pandemic days in 2020 to the first quarter of 2024, according to a new report by Realtor.com®.
“Right before the pandemic, in the first quarter of 2020, the typical down payment for a primary home was 10.7% of the purchase price, and the median down payment amount was roughly $14,000,” says Hannah Jones, Realtor.com senior economic research analyst.
In comparison, in the first three months of 2024, down payments have risen “significantly” since pre-pandemic days, says Jones. They’re now an average of $12,000 more, up to 13.6% and $26,400.
“Down payments remain well above pre-pandemic levels, as a share of purchase price and as an absolute dollar amount,” explains Jones.
To arrive at these findings, the Realtor.com economic team analyzed down payment trends across the United States up through the first quarter of 2024 using data from Optimal Blue. The team then calculated the down payment as a percentage of the sale price by averaging the data, and as a dollar amount by taking the median.
Granted, although down payments for the first quarter of 2024 are higher than they were four years ago, they have fallen from the historic peak they reached in the last quarter of 2023, when the average buyer shelled out about $30,400 (14.7%).
Why down payments are so high
Both climbing mortgage rates and general market dynamics are driving buyers to put more money down, according to Jones.
But there is some good news: While down payments are up overall, they fell by about $12,000 in the first three months of 2024.
How the pandemic put upward pressure on down payments
As is true of many of today’s housing market woes, the rise in down payments can be traced to the feverish housing market sparked by the pandemic.
First, buyers faced intense competition in a tight race for limited inventory. To stand out from the home-shopping crowd, many buyers offered sellers a larger down payment.
As the pandemic wound down and competition started to wane, mortgage rates rose from historic lows of 2.65% for 30-year fixed loans, soaring to the mid-6% to 7%-plus over the past few months, according to Freddie Mac.
For homebuyers facing a high rate over the life of their home loan, more money down equals less a buyer has to borrow—and pay in interest.
As a result, only people with pockets deep enough to overcome the housing market’s affordability headwinds can buy a home at the moment—and so they usually have money for a down payment.
The increase in the typical down payment dollar amount is also due to the rise in median home prices, which in turn jacks up the down payment share.
The median cost of a home in April was $430,000. In February 2020, it was $305,485. These rising listing prices are “pulling down payments higher as well,” explains Jones.
The pandemic nest egg
The final reason down payments have ballooned is due to a significant increase in personal savings during the pandemic. The U.S. personal savings rate peaked at over 30% of individuals’ disposable incomes, well above the pre-pandemic average of 6.5%.
This buildup in savings supported consumer spending and larger down payments.
As of March 2024, the personal savings rate was just 3.2%, below the pre-pandemic norm. Yet the nest egg built up during the pandemic continues to be felt in the housing market.
“The recent fall in the savings rate has taken a toll on excess savings, but at an aggregate level, the nest egg built up during the pandemic has not been fully depleted,” says Jones. “Thus there is still excess personal savings, likely fueling both overall consumption and home down payment growth.”
The 20% down payment myth
Some would-be buyers might look at the recent 13.6% down payment figure and wonder why it’s lower than the recommended 20%.
This 20% figure is nice in that it’s the minimum needed to avoid paying private mortgage insurance, which tacks on an extra 0.3% to 1.15% to the price of your total home loan.
So while putting 20% down will save you money on your mortgage, “it is not necessary to have a full 20% save in order to buy a home,” explains Jones.
“The typical down payment has not been this high in the data’s history because many buyers, either out of necessity or strategy, choose to put down less as a down payment and pay for private mortgage insurance,” says Jones. “But you might find it advantageous to as it serves as equity in your home right off the bat, minimize interest payments, and may benefit your case in a multiple-bid scenario.”