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Down Payment the Top Hurdle Holding Back Would-Be Home Buyers
- Saving for a down payment was a barrier to homeownership for more than two-thirds of renters surveyed in a new Zillow survey, topping other hurdles including qualifying for a mortgage and job security.
- Still, more than half (63 percent) of renters said they are confident they will be able to afford a home someday, with 25 percent saying they plan on buying in the next three to five years.
- The majority of respondents (66 percent) said they believe owning a home is necessary to live The American Dream, and 72 percent said they believe owning a home increases their standing in the local community.
Saving a sufficient down payment is the biggest obstacle for renters looking to transition to homeownership, regardless of their age, income, gender or geography – a hurdle likely to get worse for many before it gets better.
Two-thirds of renters nationwide (67.9 percent) cited saving for a down payment as the biggest hurdle to buying a home, according to the first Zillow Housing Aspirations Report (ZHAR), a semi-annual survey of 10,000 Americans seeking insight into their views on homeownership and their housing plans.
Thanks largely to low mortgage interest rates, monthly mortgage payments are generally more affordable than monthly rent payments, making homeownership an attractive financial option for many current renters. But the sometimes hefty down payments required to buy in the first place are preventing many renters from taking advantage of the savings. And rapidly rising home values, combined with interest rates that have also begun to creep up, mean that savings window could close before many are able to take advantage of it.
Down Payments: A Widespread Concern
Difficulty in affording a down payment was universally cited as the top barrier to homeownership by renters in virtually all major demographic groups. It was the top barrier cited by respondents from all 20 major metro regions surveyed. More women (72.2 percent) than men (62.2 percent) cited down payment difficulties as a barrier, but both genders noted down payment affordability as a barrier more than any other factor.
Millennial renters (aged 18-34) were more likely than older Gen X (35-54) and Baby Boomer/Silent Generation renters (55 and older) to note down payment woes – 69.2 percent, 68.5 percent and 64.3 percent, respectively – but all three groups noted down payment challenges more than other choices. Down payment concerns were surprisingly more prevalent among those in the highest income bucket than in the lowest, but again, renters in low (65.9 percent of respondents), middle (70.4 percent) and high (67.3 percent) income brackets all cited down payment struggles more than other factors.
Behind down payment woes, the next-most-commonly cited barriers to homeownership among U.S. renters were qualifying for a mortgage (53.2 percent of respondents said this was a concern) and debt burdens (50 percent). Other factors cited as barriers to homeownership included job security (38.5 percent), the renter not being in a position to settle down (20.1 percent) and complaints about not enough homes being for sale (11.2 percent).
Given the many hurdles that need to be cleared before successfully buying a home even in the best market conditions, it might be somewhat surprising that down payment concerns resonated so strongly with respondents. But in the order of operations that is buying a home, it all starts with securing a down payment, which will help determine a final budget, which will lead to actually finding a home within that budget to purchase, and finally to securing a mortgage and going to closing.
A Closing Window?
Home values nationwide have been growing at a rapid pace for well over a year now – February marked the 55th consecutive month of annual U.S. home value growth and the 18th month in a row in which annual appreciation exceeded 5 percent. But while that growth is generally positive for the U.S. economy overall and for current homeowners in particular, for renters trying to save for a down payment on a home, it can often feel like trying to hit a moving target. A renter saves up enough to put a decent amount down on a home in their price range, perhaps only to find out that home has appreciated in value beyond their means.
And not only is it difficult to determine the right amount to save, renters also have the added challenge of trying to save when they’re already paying more of their income to rent in the first place. As of the end of 2016, the typical home buyer nationwide buying the median-valued home could expect to pay about 15.8 percent of their household income to a mortgage. A typical U.S. renter, unable to take advantage of low mortgage interest rates, should have expected to pay 29.2 percent of their income to their landlord each month – and close to half their income in a handful of very pricey markets. And as the share of income spent on rent rises, saving money for anything – let alone tens of thousands of dollars set aside for a down payment – becomes increasingly difficult.
Finally, even as owning a home retains its financial advantages over renting, those advantages are beginning to narrow. In 2016, typical U.S. household incomes grew 2.2 percent, a slowdown from growth of 3.3 percent in 2015. The mortgage payment on the average U.S. home, on the other hand, grew by 9.9 percent in Q4 2016, up from 6.7 percent in Q4 2015. In other words, rising mortgage interest rates and continued home value growth helped make mortgages less affordable by the end of 2016 than they’ve been in half a decade – a trend likely to get worse.
More than 100 economists and real estate experts nationwide recently surveyed by Zillow said they expect home values to rise another 4.4 percent in 2017 and 17.3 percent, cumulatively, through 2021 (on average). And Federal Reserve projections suggest a 100 basis point increase in the Federal Funds Rate (which influences mortgage rates offered by lenders) over the next year, putting conventional, 30-year, fixed mortgage rates in the 4.75-5 percent range by the end of 2017. This rate is still low by historical standards, but high enough to give some buyers sensitive to small changes in monthly payments pause. So while mortgages look set to remain more affordable than renting for the foreseeable future, the time to lock in as much savings as possible before the gap narrows is right now – as if renters already struggling to save a down payment didn’t have enough to worry about.
Still, the first ZHAR isn’t all doom and gloom. Results suggest a great deal of confidence in the housing market, despite challenges, and an encouraging amount of faith in the importance of homeownership to achieving the American Dream.
Here are some additional highlights from the report:
- Almost all respondents (90 percent) said they are confident they will be able to stay in their current home for as long as they want. Respondents in Atlanta and Detroit were the most confident.
- More than half (63 percent) of renters are confident they will be able to afford a home someday, with 25 percent saying they plan on buying in the next three-to-five years.
- Millennial renters are more confident than any other generation that they will be able to afford a home someday.
- The majority of respondents (66 percent) said they believe owning a home is necessary to live The American Dream, and 72 percent said they believe owning a home increases their standing in the local community. Millennials believe these two statements more than any other generation.