If you want to buy a house anytime soon, you better start saving—immediately, and in large quantities. Toward the end of 2010, the median down payment on homes bought with conventional mortgages was 22% in a sampling of major U.S. cities, up from as low as 4% in the fourth quarter of 2006.
The move to force home buyers to lay out more cash is driven mostly by banks, who have found that larger down payments discourage delinquencies by increasing the buyers’ exposure to loss and reducing the impact of declining prices. Many home buyers placed little, if anything, down during the boom.
A chart in the story shows that the median down payment on homes was at or above 20% in 2010 in several sample cities (Chicago, Vegas, L.A., Miami, Phoenix, San Diego, San Francisco, Seattle, Stockton, Tampa, D.C.). Obviously, it’s easier to buy a home—or to buy a bigger, more expensive home—if banks didn’t require such substantial down payments. So the effect has been that consumers who used to be able to buy now can’t, and those who used to be able to buy pricier properties now must scale back their ambitions. All of which is likely to stifle the housing market.
For those who can’t scrape together sizeable down payments, there are alternatives. Loans backed by the FHA require only 3.5% down, for example, though borrowers must typically pay higher interest rates and kick in with regular payments for private mortgage insurance.
If putting 20% down becomes the standard—and that used to be the case as recently as the late 1990s—that’s obviously bad for folks hoping housing prices will soar. But many personal finance experts have long said that no one should buy a home unless he or she is able to put 20% down. Even PF gurus who are against buying homes with cash recommend putting 20% down.
And what if you just can’t put 20% down? Well, one could argue that if you’re incapable of saving up 20% of your desired home’s price, then either you might not have the discipline to be a homeowner, or the home you want is just plain too expensive.