Homebuyers Are Putting Down Huge Amounts of Cash

Americans are paying more in down payments as elevated home prices are causing prospective homebuyers to have to come up with more upfront cash to purchase properties, a Redfin analysis shows.

House prices are nearly 7 percent higher in February compared to what they were a year ago, which has contributed to the typical buyer putting down 15 percent of a purchase price compared to 10 percent the year prior.

Higher prices, though, are not the only reason making buyers pay more in the initial payment when buying property. High mortgage rates are contributing to would-be homeowners wanting to pay more of the downpayment than they might have in the past.

“A bigger down payment means a smaller total loan amount, and a smaller loan amount means smaller monthly interest payments,” according to Redfin.

To illustrate how much people are able to save when paying more in a down payment, Redfin looked at how much someone would have to spend a month on their mortgage outlays if they bought a house at the national median price of $374,500. If a buyer puts down 10 percent on a 6.79 percent rate, their mortgage payments would amount to nearly $3,000 a month. A 15 percent down payment would mean monthly payments of a little over $2,800.

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Mortgage rates have been elevated, partly due to the Federal Reserve hiking its funds rate to battle high inflation. At one point in the fall of last year, borrowing costs soared to the highest since the turn of the century. While rates have declined since then, they are still hovering around the 7 percent range, much higher than they were during and prior to the pandemic.

While elevated housing prices are contributing to buyers paying more in down payments, they may be able to afford such higher cash up front because of the value their pervious homes have accrued over the last few years as homes have become more expensive.

“Some of those people may not have the income to qualify for a large loan, but the equity they’ve built allows them to make a bigger down payment so that they can purchase the house they want with the smaller loan that they do qualify for,” Redfin points out.

Cash is increasingly becoming king

One other development that is shaping the housing market is buyers are more and more purchasing homes in all cash transactions.

More than a third of purchases, 34.5 percent to be exact, in February were paid for in cash. This is higher than last year when cash transactions accounted for 33.4 percent of purchases.

“Some homebuyers are paying in cash for the same reason others are taking out large down payments: elevated mortgage interest rates,” Redfin said. “A large down payment helps ease the sting of high rates by reducing monthly interest payments, whereas an all-cash purchase removes the sting altogether because it means a buyer isn’t paying interest at all.”

Some of these purchases are from investors but they also come from wealthier Americans who can afford to pay all-cash when buying a home. This is contributing to the crowding out of first-time home buyers, said Redfin Economics Research Lead Chen Zhao.

“High mortgage rates are widening the wealth gap between people of different races, generations and income levels,” she said.

Soaring home prices during COVID as buyers took advantage of plunging mortgage rates led to this division on who is able to buy property. To drive the point home, Redfin points out that in February all-cash purchases were nearly 3 percent higher than a year ago but sales secured through mortgages fell by nearly 3 percent.

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“Wealthy Americans are the only ones who can afford to buy homes. Meanwhile, people who are priced out of homeownership are missing out on a major wealth building opportunity, which could have financial implications for their children and even their children’s children,” Zhao said.