First home buyers in the US struggle to save for a down payment

It is estimated to take a full year longer to save for a down payment on a US starter home than it did five years ago, a new Zillow study has found.

If an average renter household saves 10 per cent of its income, it would take about six and a half years to save enough for a 20 per cent down payment on a typical starter home in the US, worth an average of $148,500.

Even the prospect of saving 10 per cent becomes increasingly more difficult, with the average renter savings rate at 2.4 per cent. As prices rise at a record pace, it may take even longer for US-based renters to save.

Zillow economic data analyst Nicole Bachaud suggested first-time buyers face more challenges in saving for a down payment, as they don’t have equity from a previous sale.

“In a housing market where prices are rising at record rates, especially when compared to renter incomes, the ever-increasing sum of a 20 per cent down payment can feel out of reach.

“The good news is that buyers who want to take advantage of today’s low mortgage rates can do so without putting a full 20 per cent down – most conventional mortgages [in the US] allow as little as 3 per cent to 5 per cent. That lower upfront payment comes with higher monthly payments, but the opportunity to build equity can outweigh those extra costs for many.”

Prices for even the most affordable homes are rising quickly. As of May, homes priced in the bottom third of a given metro area, often thought of as starter homes for first-time buyers, are growing faster than the typical mid-market home in 42 of the 50 largest US metro areas.

Those who are just starting to save may need to factor in this rapid pace of home value growth. Zillow has forecast 14.9 per cent appreciation over the next year, which would mean renters need to save an additional $369 per month just to keep up. 

Renters in California face the biggest barriers to saving for down payments. 

San Francisco renters earn nearly twice as much money as the typical US renter, yet home prices are so high that it would take 17 years and five months to save enough to put 20 per cent down on a local starter home. That’s 11 years longer than the US average.

It would take even longer in Los Angeles and San Diego.

Among the top 50 metro areas, renters in Birmingham, Memphis and Detroit could save for a down payment the fastest. 

While this may seem daunting, it’s possible to secure a mortgage while putting less than 20 per cent down.

In fact, a majority (64 per cent) of first-time buyers do so, and one-quarter put down five per cent or less, according to Zillow.

Renters can save up a 10 per cent down payment on a typical starter home after three years and three months, and accruing a 5 per cent down payment would take only a year and seven months. 

A smaller down payment, of course, comes with tradeoffs on the monthly mortgage payment, such as the private mortgage insurance lenders often require borrowers to carry.

At the current US rates, the mortgage payment on a typical starter home would be only 18.9 per cent of a typical renter’s monthly income, well below the 30 per cent rule of thumb for housing affordability. Buyers may decide the benefits of homeownership and the chance to build equity sooner outweigh the additional housing cost burden each month.

The new freedom for many to work remotely may also help many renters move into homeownership, as renters in high-cost areas can more easily save for a home in a less expensive areas.

A typical San Francisco renter, if able to do their job remotely, could save enough for a 20 per cent down payment on a starter home in Austin in about six years and eight months, and a similar home in Phoenix in five years and seven months.

A similar renter in Boston could save enough for a 20 per cent down payment on a starter home in Miami in half the time it would take for a local starter home – six and a half years, instead of 13 years.

On the other hand, a typical renter in Austin hoping to make a move to San Francisco would need to save for 28 years and three months.

Because of differences in incomes and the lingering impacts of historical inequities, it is more difficult for Black and Latinx renters to come up with a down payment on their first home.

It would take six years and one month for a white renter earning the median income, and four and a half years for an Asian American renter earning the median income to save for a 20 per cent down payment on a starter home, compared with nine years and seven months for a Black renter, and seven years and eight months for a Latinx renter. 

Black and Latinx home buyers are more likely than white home buyers to say they saved at least part of their down payment themselves, according to Zillow.

Zillow suggested this may be a possible consequence of the racial wealth gap, as Black and Latinx buyers are often less able to rely on family to help out financially.

Along with structural barriers such as less access to credit and higher rates of mortgage-application denials, this is a contributing factor to the racial homeownership gap.