For many, visiting a childhood home will bring forth a rush of memories and emotions. Visions of days long since passed: barbecues in the backyard, swimming for hours with friends and family, grandparents laughing on the back patio. Homes are more than brick-and-mortar structures that provide shelter. Homes offer a firm foundation — emotional, spiritual and physical — in life to move forward in the world with confidence. These small pieces of earth truly make you who you are today.
Unfortunately, for a staggering number of American families, the reality of owning a home of their own is at an all-time low. Median home prices are now six times more than the average American household income, according to a recent report by Econofact.
Affordability challenges
Historically, the cost disparity between wages and affordable housing has consistently been an issue in higher-cost markets, such as San Francisco or New York City. But affordability challenges have steadily been on the rise elsewhere due to the increase in home market values experienced during, and after, the COVID-19 pandemic. This means that many housing markets are now unaffordable for low-to-moderate income potential homeowners.
This increase in property values comes hand in hand with an increase in the downpayment funds needed to purchase a home. The average downpayment for a home in 2023 was $84,000, according to CoreLogic. Even for lower-tier homes, the downpayment cost was $29,987.
Even those individuals who are fortunate enough to benefit from generational homeownership are having a harder time asking mom and dad to gift them the downpayment on their first home. And those Americans whose families have never entered homeownership are having an even more difficult time saving for the ever-increasing downpayment needed.
Does this mean that the American dream of homeownership is more unattainable than ever before? According to the Urban Institute, younger adults and those whose parents were not homeowners due to a lack of access will be less likely to become homeowners. When comparing the intergenerational support given to those who eventually become homeowners, the institute said that a third of first-time homebuyers got assistance from family or friends for a downpayment.
By contrast, this assistance is far less likely when a borrower’s parents are not homeowners. How can the homeownership gap be bridged for these marginalized communities that lack access to gifted funds for their downpayment?
Missed opportunities
Many efforts to give homeowners more financing options focus on downpayment assistance (DPA) programs. These can help to overcome one of the greatest obstacles to purchasing a home: the time it takes to save for the downpayment.
The average cost of a home in the U.S. has hit an all-time high of $535,800, according to a recent report from The Ascent. If you comply with the old adage of saving 20% for your downpayment, that amount is now a staggering $107,160. If you opt to use a Federal Housing Administration (FHA) loan, the minimum required downpayment amount is 3.5% — but that still amounts to $18,753.
The median U.S. annual salary in 2023 was just shy of $60,000 per year, according to the U.S. Department of Labor. If you were able to save 5% of your annual gross salary and designate those funds specifically for a downpayment, it would take six years to reach the amount needed for a 3.5% downpayment.
Think of all the missed homebuying opportunities that could pass by over a six-year period. And as prices continue to rise, the downpayment required will increase as well, further expanding the time needed to save those funds.
Crucial tool
The Urban Institute states that DPA programs are crucial for first-time homebuyers without access to generational wealth. The institute noted that the need for DPA programs corresponded with the growth in the number of U.S. households.
As of June 2023, there were over 1,700 DPA programs in the U.S. Most of these are state-based, but there are national DPA programs. National DPA programs expand access to downpayment funds to a larger swath of individuals and have universal underwriting guidelines, meaning one consistent set of guidelines, regardless of the state or county where the individual lives. These programs often have expanded credit boxes, creating opportunities for more consumers by allowing them to qualify more easily.
The Urban Institute also projected that there are 14.5 million renting households who can potentially become first-time homebuyers by taking advantage of these DPA programs. These households are in the age range of 25 to 54 and are considered in the prime home-buying bracket. But even moderate-income borrowers in this bracket were priced out and excluded from many markets thanks to rising interest rates and home prices.
DPA programs exist to help this generation of would-be buyers succeed despite these affordability challenges. They are designed to cater to those with less access to familial wealth, often permitting higher income thresholds than other income-targeted programs, because the need is so great. ●
