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Downpayments rise with stiff competition for homes

With homes for sale in short supply, it’s been tough out there for would-be homebuyers competing against multiple other buyers. To sweeten offers and beat the competition, homebuyers have been shelling out some of the largest downpayments in years, tracking data suggests.

The U.S. median downpayment in the second quarter was $19,900, a record high and up 18 percent compared to the same quarter in 2017, according to Attom Data Solutions.

downpaySome cities have seen the median downpayment on a house grow to staggering heights. In the California cities of San Jose and San Francisco, the nation’s two most expensive housing markets, the median downpayment was $306,000 and $220,000, respectively.

To put that in perspective, the national median price for an existing home in June was $255,000, according to Attom Data Solutions. In other words, you could buy a U.S. median priced house outright with cash and have $51,000 left over for what the median homebuyer in  San Jose — at least half the homebuyers there — put down for a home in that city.

The downpayment amount will naturally tend to go up as home prices rise, but it also is rising as a percentage of the overall sales price, according to Attom Data Solutions.

In the second quarter, the median downpayment represented 7.6 percent of the median sales price, a nearly 15-year high and up from 6.6 percent a year earlier.

Attom Data Senior Vice President Daren Blomquist said this reflects the present realities for buyers.

“Despite some signs of cooling off, the housing market continues to be extremely competitive,” Blomquist said. “Buyers with higher down payments are better-positioned to qualify for loans and therefore win out in multiple-offer situations.”

Blomquist also said that while credit standards are loosening, lenders are requiring “more skin in the game” in return for taking on riskier borrowers.

“A lender might qualify a lower-credit, higher debt-to-income ratio borrower if that borrower is able to provide a higher downpayment,” he said.

Other tracking data provides a mixed message on downpayments, though.

Surveys from the National Association of Realtors (NAR) suggests that fewer homebuyers are making very small downpayments, but also fewer are making large downpayments.

NAR reported that 58 percent of first-time homebuyers in August made a downpayment of less than 6 percent of the sales price. That ticked up a bit from July, but is down from a recent-era high-water mark of 68 percent, and has generally declined since 2011.  

On the other hand, the survey also found that fewer homebuyers — first-time homebuyers and buyers of all types — are making downpayments of more than 20 percent. The percentage of all buyers putting down at least 20 percent was down to 51 percent in August, falling from a high-water mark of 63 percent in early 2012.  

“In general, rising prices force borrowers to use smaller downpayments,” said Ken Fears, NAR’s senior policy representative. However, he also noted a larger downpayment signals to a seller’s agent that the buyer is more prepared to close on a deal. And some buyers have also been putting more down to reduce their monthly payments and interest, especially as rates rise.

“In an environment of strong competition for few houses, the potential buyers with larger downpayments and better credit profiles are likely winning and have been for some time,” Fears said.  

According to the American Enterprise Institute (AEI), loan-to-value ratios (LTVs) have been stable for the past five years. The median LTV was 95 percent in June, which was unchanged from the June 2017 rate. This implies that at least half the borrowers of loans guaranteed by the government agencies or Fannie Mae/Freddie Mac put 5 percent or less down.

The average LTV has also been stable for several years at 89 percent, according to AEI’s data, which is based on the actual reported loan data. AEI’s figures refer to loans on primary homes, and exclude investors and second homes.

Ed Pinto, co-director of AEI’s Center for Housing Markets and Finance, said LTVs have already maxed out, and have nowhere to go. 

“It is already so high,” Pinto said. “The median is 95, so half the people have less than 5 percent. It can’t go much higher.”

Pinto said while downpayments have been stable, borrowers have been bidding up properties. That has increased their debt loads on mortgages. The average debt-to-income (DTI) ratio has jumped 1.4 percentage points, to 39.9 percent, over the 12 months through this past June.

“That is a significant increase,” Pinto said. 


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