Housing down payments hit all-time high as buyers battle high mortgage rates

Americans are putting down a record amount of money in order to secure a new home as they continue to grapple with high mortgage rates and a worsening inventory shortage. 

Down payments hit a new peak in the third quarter of 2023, as high borrowing costs and the competitive market drove buyers to make a bigger contribution, according to a new report published by Realtor.com. 

Buyers put down $30,434 on average in the third quarter, according to the report, up 11.3% from the same time one year ago and a stunning 118% from four years ago.

The report also found the average down payment percentage hit 14.71% of the purchase price at the end of the third quarter, the highest level since Realtor.com began tracking the data in 2013. By comparison, the typical payment level before the COVID-19 pandemic began was about 11%. 

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“As long as demand continues to outmatch supply, the housing market will stay competitive and down payments are likely to remain elevated,” said Danielle Hale, Realtor.com chief economist. “Furthermore, tapping into existing savings or home equity to put a larger amount down on a home may also enable shoppers to minimize the sting of higher mortgage rates.”

The reason that buyers are making bigger down payments is two-fold. A bigger chunk of change upfront can help to reduce the size of a loan and offset the pain from higher mortgage rates, which spiked over the past year as a result of the Federal Reserve’s aggressive interest rate hike campaign. 

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Borrowing costs have retreated noticeably over the course of November, as many investors believe the Fed is done hiking interest rates following two cooler-than-expected inflation reports last week.

Rates on the popular 30-year fixed mortgage fell to a two-month low of 7.44% last week, according to Freddie Mac, down from a high of 7.79% at the end of October but well above the pre-pandemic average of 3.9%.

However, affordability constraints are likely to persist. Mortgage rates are expected to remain elevated in coming months, as the Fed has signaled that it may hold interest rates at peak levels for longer than previously anticipated. 

A bigger down payment also makes buyers more competitive in situations where there are multiple bidders.

The rise in mortgage rates has severely limited supply over the past year with potential sellers not wanting to get out of a 3.5% mortgage to get into a 7% mortgage. That leaves fewer homes for sale with higher consumer demand. A separate report from Realtor.com showed available home supply remains down a stunning 42% from the typical amount before the COVID-19 pandemic began in early 2020.

“With many homeowners opting to stay put rather than list their homes for sales amid elevated mortgage rates, buyers faced limited for-sale inventory and more competition, which led many to make higher down payments to help win multiple-bid scenario,” said Hannah Jones, Realtor.com economic research analyst.

The jump in down payment size is “especially significant” given the astronomical 25.4% rise in median home prices since 2020. 

A larger percent down on higher-priced homes typically means the buyers paid 78.2% more as a down payment in the third quarter of 2023, when compared with the first quarter of 2020, when they paid about $17,000.