Down Payments Posing a Roadblock for Renters to Become Owners

Renting is less affordable than paying a mortgage on a monthly basis, but down payments are a barrier to many first-time buyers.

- Paying for a mortgage continues to be more affordable than renting on a monthly basis across the U.S.

- At the end of the third quarter of 2015, buyers could expect to spend 15 percent of their monthly income on a mortgage, and renters could expect to spend 30 percent of their income on rent.

- All but one of the 35 largest metros have rental affordability worse than the historical average, making it difficult for renters to save money for a down payment.

Nov 11, 2015, 08:00 ET from Zillow

SEATTLE, Nov. 11, 2015 /PRNewswire/ -- Paying for a mortgage is still more affordable than renting in the U.S., but saving enough money for a down payment has become increasingly difficult for first-time buyers, especially in markets where home values are rising rapidly.  

With the majority of renters in the largest metros putting about 30 percent of their monthly incomei toward a rental payment, saving money for a 20 percent - or even 10 percent - down payment is extremely difficult. First-time homebuyers and millennials are left trying to find other ways to break into the housing market, turning to friends and family for financial help. In 2014 alone, 13 percent of home purchases were bought using a loan or gift from friends or family for the down payment.

Rental affordability worsened in 28 of the 35 largest metros over the past year, and mortgage affordability worsened in just 18 of them.

According to a third quarter Zillow® analysis of U.S. rental and mortgage affordabilityii, residents of the Denver metro can expect to spend about 21 percent of their income on a mortgage, compared to 34 percent on rent. In the U.S. as a whole, homeowners can expect to spend 15 percent of their income on a mortgage, and 30 percent on rent. But getting that mortgage payment requires a homebuyer to have saved $62,760 for a 20 percent down payment - the industry standard - on a median-valued Denver home, which is $313,800.

In the Boston and Miami markets, the median monthly mortgage payment requires just 22 and 20 percent of monthly income, respectively. Renting is substantially more expensive, influencing many renters to start thinking about purchasing a home; 35 percent of the median income pays the median rent in Boston, and 44 percent in Miami. However, to purchase a home in Boston, a 20 percent down payment is $76,220. In Miami, buyers need to have saved $44,680.

Breaking into the housing market is less of a challenge in more affordable markets, like Cleveland. A 20 percent down payment on the median home there is $25,000, or $12,500 for 10 percent down. Residents of Cleveland can expect to spend 11 percent of their monthly income on a mortgage payment. Renters in Cleveland spend quite a bit more on rent: 27 percent of their monthly income.

"In general, paying a mortgage is more affordable than renting, and has been for some time. Unfortunately, many current renters aren't able to realize the savings that come with homeownership because as home values and rents keep rising, it's getting increasingly difficult to clear the down payment hurdle," said Zillow Chief Economist Dr. Svenja Gudell. "It's not uncommon for a 20 percent down payment on even a modest home to represent savings of $50,000 or more in some areas. And that number itself is a moving target, rising as home values escalate and harder to achieve as more money goes to landlords and less goes to savings. Using a smaller down payment is an option, but often comes with the added cost of mortgage insurance. Knowing this, it's no wonder that many current renters are waiting longer to buy a home and are turning to alternate sources, including friends and family, to help them scrape together a down payment."

In 34 of the largest 35 metros, rental affordability is worse than the historical average. Pittsburgh is the only housing market where residents pay less than the historical average for rent, about 25 percent of income; historically, renters in Pittsburgh spent 27 percent.

 

Metro Area

% Monthly Income for Mortgage Payment

% Monthly Income for Rent

Zillow Home Value Index, Q3 2015

YoY Change in Zillow Home Value Index

20% Down Payment on Median Home

United States

15.0%

30.2%

$182,500

3.7%

$36,500

New York-Northern New Jersey

24.9%

42.0%

$379,000

1.6%

$75,800

Los Angeles-Long Beach-Anaheim, CA

39.9%

48.8%

$547,900

4.5%

$109,580

Chicago, IL

13.7%

31.4%

$191,000

2.2%

$38,200

Dallas-Fort Worth, TX

12.8%

29.6%

$173,100

15.2%

$34,620

Philadelphia, PA

14.3%

29.9%

$201,800

0.0%

$40,360

Houston, TX

12.3%

30.6%

$167,000

8.9%

$33,400

Washington, DC

17.2%

27.2%

$355,300

-0.6%

$71,060

Miami-Fort Lauderdale, FL

20.4%

43.9%

$223,400

10.4%

$44,680

Atlanta, GA

12.9%

27.2%

$164,000

5.7%

$32,800

Boston, MA

22.2%

35.1%

$381,100

5.7%

$76,220

San Francisco, CA

40.6%

47.0%

$768,000

12.0%

$153,600

Detroit, MI

10.1%

25.2%

$119,200

6.4%

$23,840

Riverside, CA

23.7%

36.4%

$293,300

5.6%

$58,660

Phoenix, AZ

17.3%

28.0%

$210,300

7.5%

$42,060

Seattle, WA

22.2%

31.7%

$359,400

8.2%

$71,880

Minneapolis-St Paul, MN

13.7%

26.0%

$213,700

3.4%

$42,740

San Diego, CA

32.3%

41.2%

$488,000

6.0%

$97,600

St. Louis, MO

11.0%

24.5%

$138,600

6.8%

$27,720

Tampa, FL

14.8%

32.9%

$156,400

7.5%

$31,280

Baltimore, MD

14.8%

28.3%

$239,200

-1.4%

$47,840

Denver, CO

20.6%

34.2%

$313,800

16.6%

$62,760

Pittsburgh, PA

10.6%

24.7%

$125,400

1.5%

$25,080

Portland, OR

22.0%

32.8%

$300,900

10.3%

$60,180

Charlotte, NC

13.0%

26.8%

$157,400

3.8%

$31,480

Sacramento, CA

24.8%

32.6%

$337,800

6.5%

$67,560

San Antonio, TX

13.5%

30.3%

$160,100

6.5%

$32,020

Orlando, FL

16.2%

32.8%

$176,500

5.8%

$35,300

Cincinnati, OH

11.1%

26.5%

$139,200

2.7%

$27,840

Cleveland, OH

11.1%

27.4%

$125,000

3.3%

$25,000

Kansas City, MO

11.3%

25.8%

$145,200

5.2%

$29,040

Las Vegas, NV

16.7%

28.0%

$194,600

7.7%

$38,920

Columbus, OH

11.7%

26.8%

$149,600

4.9%

$29,920

Indianapolis, IN

10.9%

26.6%

$128,500

3.5%

$25,700

San Jose, CA

41.6%

41.4%

$911,000

12.5%

$182,200

 

About Zillow
Zillow® is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with the best local professionals who can help. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow's Chief Economist Dr. Svenja Gudell. Dr. Gudell and her team of economists and data analysts produce extensive housing data and research covering more than 450 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. Zillow also sponsors the bi-annual Zillow Housing Confidence Index (ZHCI) which measures consumer confidence in local housing markets, both currently and over time. Launched in 2006, Zillow is owned and operated by Zillow Group (NASDAQ: Z and ZG), and headquartered in Seattle.

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__________________________ i Incomes in this analysis were determined using Moody's Analytics estimates and the Q3 2015 regional Employment Cost Index. ii Zillow determined affordability by analyzing the current percentage of a metro area's median income needed to afford the rent or the monthly mortgage payment on a median-priced home or apartment, and compared it to the share of income needed in the pre-bubble years between 1985 and 1999. For mortgage affordability, Zillow assumed a 20 percent down payment and a 30-year, fixed-rate mortgage at prevailing mortgage rates pulled from the Freddie Mac Primary Mortgage Market Survey. If the share of monthly income currently needed to afford the median-priced home or apartment is greater than it was during the pre-bubble years, that area is considered unaffordable for typical buyers or renters.

 

SOURCE Zillow