Higher mortgage rates are leading to smaller down payments, as new buyers face less competition for homes and seek to keep more dollars in their pockets for what may be a rough road ahead.
Nationally, the average down payment dropped to 10% in January, compared to 14% a year ago, according to Redfin. It’s the smallest down payment in almost two years, and off from the pandemic-era peak of almost 18%.
As consumers competed for the few homes on the market during the first few months of the pandemic, down payments soared to make offers more attractive to sellers. But the attention-getting down payments have faded in favor of frugality in recent months.
DEEP FREEZE THIS SPRING WHEN IT COMES TO HOME SALES
Down payments have plummeted more than 30% in the Riverside and Sacramento regions, among the most affordable of the eight markets tracked by Redfin for the report. Riverside and Sacramento also have the smallest down payments at 9.7% and 12.4%, respectively.
But even some Bay Area buyers cooled on down payments, with a 17% decline in Oakland and 7.5% lower in San Francisco. However, despite the drop, San Francisco had the highest down payment at $325,000 and the largest percentage in the nation.
The Federal Reserve’s ongoing interest-rate hikes since last spring have put the housing market in a deep freeze. The state’s home sales are down significantly from last year, and the median home price is off 18% since the peak in May, according to the California Association of Realtors.
The often-busy spring and summer homebuying season may be more ho-hum than usual since many homeowners are holding off on selling because of the higher interest rates and home shoppers are forced with paying several hundred – or even a couple of thousand – dollars more per month for a mortgage payment than a year ago. It’s like a middle-school dance where nobody dares to make the first move.
And homeowners and home shoppers are facing another challenge – an economy that could dip into a recession in the coming months, especially as more companies trim their workforces. Amazon, Disney, Facebook parent Meta, Google and mortgage companies are eliminating positions. And more will follow, according to economists.
Down payments by region compared to a year ago
| Metro | Down payment | % change from a year ago | % of purchase price |
|---|---|---|---|
| Anaheim | $215,000 | -2.3% | 20% |
| Los Angeles | $141,044 | -8.4% | 20% |
| Oakland | $147,600 | -17.3% | 20% |
| Riverside | $38,744 | -38.4% | 9.7% |
| Sacramento | $58,254 | -32.5% | 12.4% |
| San Diego | $124,000 | -6.1% | 20% |
| San Francisco | $325,000 | -7.5% | 25% |
| San Jose | $300,000 | -3.2% | 20% |
Source: Redfin
A ‘SILVER LINING’ WITH HIGHER RATES
But the current economic conditions could help homebuyers, sort of.
“One silver lining of high mortgage rates and economic turmoil is that they’ve slowed competition” for homes, says Redfin senior economist Sheharyar Bokhari. “That means buyers are often able to purchase a home without facing a bidding war and don’t need to fork over a huge portion of their savings for a down payment to grab sellers’ attention.”
Of course, the bigger the down payment, the smaller the monthly mortgage payment. It’s a pay now or pay later situation.
With the cooling housing market, buyers are definitely in the driver’s seat when it comes to negotiations. So, go ahead, ask for a new carpet credit or demand the decades-old garage door be replaced.
“Nearly half of sellers are offering concessions, like helping pay for a mortgage-rate buydown or covering closing costs, to attract buyers,” Bokhari says.
Feature photo: Menifee, a city in Riverside County, where down payments have plummeted.ADOBE STOCK
Bad economy? More cash deals? Yep, a lot more
All-cash deals continue to climb, as more deep-pocketed homebuyers avoid the highest mortgage rates in 15 years.
Nationally, almost one in three buyers bought their homes with cash in January, the highest percentage in nine years.
And California has some of the cities with the largest share of cash deals in the U.S.
Almost two of every four homes (37%) sold in Riverside were bought with cash in January, 14.8 percentage points higher than a year ago, according to Redfin.
Homeowners with a ton of equity – almost two of every three are considered equity rich in California – likely accounted for much of the cash deals. Buy a home a decade ago, enjoy huge gains and sell for a nifty profit that can pay for another home. Of course, some buyers have benefited from the decade-long boom on Wall Street.
Oakland, one of the more affordable housing markets in the Bay Area, had the smallest percentage of cash deals at 14% in the nation, but that was still up almost 2 percentage points from a year ago. Los Angeles had the third-fewest cash deals at 20%, also up 2 percentage points from a year ago.
So, cash deals are gaining ground with mortgage rates at the highest level since the Great Recession.
ALL-CASH DEALS BY METRO REGION
- Anaheim: 26.1%
- Los Angeles: 19.9%
- Oakland: 13.9%
- Riverside: 37.1%
- Sacramento: 23.7%
- San Diego: 20.6%
- San Francisco: 24.4%
- San Jose: 20.8%
