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Down Payments are Down, but are Home Sales Up?

by James Bellandi

Down payment trends may hint at first time homebuyer confidence

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The average down payment for single-family homes, condos and townhomes was down to 14.8 percent of the purchase price for Q1 2015, the lowest number since Q1 2012, according to a recent report by RealtyTrac.

The report, Q1 2015 U.S. Home Purchase Down Payment Report, noted that the average down payment was down from 15.2 percent last quarter, and 15.5 in Q1 2014.

The average down payment for FHA purchase loans was down to 2.9 percent of the purchase price, and the average down payment for conventional loans was 18.4 percent of the purchase price. FHA loans as a share of loan originations increased throughout the quarter as well, from 21 percent in January to 25 percent in March.

To Daren Blomquist, vice president at RealtyTrac, these trends suggest that first-time homebuyers are beginning to invest in homes.

“Down payment trends in the first quarter indicate that first-time homebuyers are finally starting to come out of the woodwork, albeit gradually,” Blomquist said.

Do Lower Down Payments Increase Homeownership?

For some time now, analysts have argued that lower down payments would boost first-time homeownership, but there are a couple opposing factors to consider.

For one, the National Association of Realtors’ existing-home sales reports have shown marginal, if any, gains in first-time homebuyers on both monthly and yearly measurements. The percent share of first-time buyers was at 29 percent in February, 30 percent in March and 30 percent in April, compared to 28 percent in Feb. 2014, 30 percent in March 2014 and 29 percent in April 2014. Those meager 2015 numbers come after Fannie Mae’s decision to lower down payment requirements to 3 percent.

Second, as we have reported previously, slow wage growth has been a recurring issue for potential homebuyers. That trend has made renting a far more desirable option as a short-term solution, because according to a recent Freddie Mac survey, potential first-time home-buyers lack the finances to invest in a house. Additionally, renter satisfaction has increased since August 2014, further hinting that renters will not sway towards homeownership.

While lower down payments are a sign of a stronger market, the ultimate deciding factor will be income levels, and whether houses are an affordable option for first-time homebuyers.

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