Time Spent Saving for Home Down Payment Getting Longer

Home values have grown by nearly twice as much as incomes have over the past 20 years, said Zillow.com, Seattle. And that is having long-term consequences, not only for Millennials but for current homeowners as well.

For someone making the median income and putting away 10 percent each month, it would take just over seven years to save for a 20 percent down payment on the typical U.S. home, according to a new Zillow analysis. That’s the longest time to save for a down payment since early 2008, shortly after home values hit their highest point during the mid-2000s housing bubble.

By contrast, 20 years ago, it took 5.5 years to save for a 20 percent down payment. Since then, home values have grown nearly twice as much as incomes have, increasing by 98.6 percent, while incomes have risen 52.6 percent.

Zillow reported home values have seen strong, steady growth since the housing crisis; nationally the typical home is worth more than ever. Although home value appreciation has slowed in recent months, homes are still gaining value faster than incomes are growing.

Saving for a down payment is one of the biggest barriers to owning a home, according to the Zillow Housing Aspirations Report, and when home values outpace incomes, it gets steadily harder to reach that goal, said Zillow Director of Economic Research and Outreach Skylar Olsen.

“The simple fact that home values have far outpaced income growth, lengthening the time needed to save for a down payment, contributes to millennials’ struggles to enter homeownership,” Olsen said. “Saving up for a down payment can be tough, especially when the cost of everyday life outpaces the money you put into the bank. It requires good budgeting and long-term planning. It’s one reason why more and more first-time home buyers are looking to family and friends for financial help when coming up with their down payment.”

Relying only on savings, it takes longest to save for a down payment in San Jose, Calif. Although the median household income is highest in San Jose ($118,061), it would take nearly 22 years of saving to come up with a 20 percent down payment for the median home, worth $1.288 million. It’s fastest to save for a down payment in Pittsburgh, where it takes 4.8 years to save for a 20 percent down payment.

Complicating the matter is the increase in home value to income. Redfin, Seattle, said a buyer with a $2,500 monthly housing budget has lost nearly $30,000 in purchasing power this year. A homebuyer with a monthly housing budget of $2,500 a month and a 20 percent down payment could afford to purchase a home for as much as $473,750 at the beginning of the year when 30-year mortgage rates were averaging around 4 percent. Now that rates have climbed above 4.75 percent, that same buyer can only afford a home priced up to $444,000–a loss of $29,750 in purchasing power, according to the Redfin analysis.

“Every fall and winter we see prices decline relative to spring and summer, but this year’s seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay,” said Redfin chief economist Daryl Fairweather. “Sellers haven’t quite come to terms with the fact that they no longer have buyers wrapped around their finger. This push and pull is likely to continue until early 2019 when the home-buying season picks back up.”

First American Financial Corp., Santa Ana, Calif., says the problem isn’t just limited to first-time home buyers; it’s affecting many homeowners as well. The company’s Potential Home Sales Model for September found homeowners are staying in their homes longer than ever, limiting supply and slowing home sales.

“Rising interest rates create a financial disincentive that prevents existing homeowners with low mortgage rates from selling their homes, further limiting supply and restricting existing-home sales from reaching their potential,” said First American Chief Economist Mark Fleming.

First American said in the aftermath of the housing downturn, median homeowner tenure increased to seven years. However, as home prices have recovered over the last 10 years, many homeowners have accumulated enough equity to sell their homes at a profit. Despite the increase in equity, median tenure length jumped to 10 years in September, a 10 percent year-over-year increase.

“Homeowners with mortgage rates below the current rate may be reluctant to give them up for a higher rate, a phenomenon known as the ‘rate lock-in effect,'” Fleming said. “There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing monthly mortgage payment. As rates rise, many existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate.”

And according to YouGov, many potential home buyers, particularly younger Americans who grew up during the 2008 Great Recession, are simply about homeownership. According to a YouGov Omnibus survey, only 28% of people without a mortgage say it’s likely that they will get one in the future.