Fewer first-time homebuyers are relying on loved ones for a down payment even as home prices soar.
The share of new homebuyers receiving down payment gifts or loans from relatives or friends during the homebuying process in 2023 was 23%, the second-lowest level in 23 years, a recent study by the National Association of Realtors (NAR) shows. The year before, the share was 22%. Both years are far below the 23-year average of 30%.
The decline of “nepo-homebuyers,” a popular internet term describing people who tap family money to afford their down payment, may seem odd given today’s sky-high home prices and elevated mortgage rates. However, experts say that today’s market is mostly filled with high-income buyers who are more self-sufficient.
“Just among all buyers, they tend to be wealthier. We’re seeing that especially in the current market, [buyers] might need to have that extra income just to be able to get into the homeownership market,” Brandi Snowden, NAR’s director of member and consumer survey research, told Yahoo Finance. “Among our first-time homebuyers, we saw that their household income rose nearly $25,000 just from the previous year.”
Read more: How to buy a house in 2023
Wealthy buyers
The decline in help from family members came at a time when first-time buyers had to put down record-high deposits to compete in the low-inventory and high-rate environment filled with all-cash and repeated buyers.
“Looking just even at the median down payment amounts, they’re higher than we’ve seen previously, in the last few decades,” Snowden said.
The percentage share of down payment to home price increased to 14.71% in Q3 2023, the highest in 10 years, data from Realtor.com shows. Down-payment dollar amounts have reached $30,434, a decade-long peak.
“We’re not seeing that lower side of down payment because those buyers just can’t play ball at all,” Hannah Jones, economic research analyst at Realtor.com, said, “whereas the buyers who are participating perhaps have a lot more money they can put down or otherwise are not so worried about the budget side of the equation.”
NAR’s data bears that out.
The median household income of first-time buyers hiked 35% to $95,900 from last year’s $71,000, NAR’s survey for buyers between July 2022 to June 2023 showed. The jump underscores that today’s buyers are not the typical buyers in the past but wealthier ones who don’t need as much help putting together down payments with contributions from families and friends.
In fact, most homebuyers tapped their own savings for their down payments, NAR’s data shows. In 2023, 71% of first-time buyers used savings for their down payment. That’s just under the 23-year average of 74%.
Other popular payment sources in 2023 were also reported by the NAR — 11% buyers used proceeds from sale of stocks and bonds, 4% had inheritance, and 4% utilized a tax refund. Starting in 2022, 2% of buyers also said they used the profit from cryptocurrency for down payment.
Does that mean today’s expensive market is organically filtering out a richer buyer pool?
“Absolutely,” Dr. Jessica Lautz, NAR’s deputy chief economist, told Yahoo Finance. “We are really seeing that especially this year, homebuyers are able to put down these higher amounts because they are wealthier.”
Rise in downpayment
Nearly 40% of new homebuyers said saving for a down payment was the hardest part in the buying process. And buyers’ need to come up with more deposits has pushed the average trends to a new high in 2023.
Typically, prospective buyers put down more cash to strengthen their offers by showcasing their financial strength. Buyers may also want to contribute a bigger deposit to lower their monthly payment given elevated mortgage rates.
“As a first time homebuyer, you’re going to need a higher down payment to make your offer seem very attractive,” Lautz said. “We still have multiple-bid situations where you have put down a higher down payment if you want to compete against that repeat buyer who may be paying all cash or financing a small portion of the home purchase.”
While typical buyers don’t put down the traditional 20% payment, NAR data shows that the average down payment share among first-timers increased to 8% in 2023, the highest since 1997 and a few percentage points higher than the 5.04% average in the last two decades.
Read more: How to get a 3% down mortgage in 2024
“We haven’t seen the down payments that high getting back into the 90s, which I think really speaks to how expensive the US housing market is,” Lautz said.
And to break into that homeownership, buyers are reducing expenses elsewhere, the NAR report shows.
“They’re cutting spending on non-essential items,” Lautz said. “First-time homebuyers are willing to sacrifice to make home purchases their ultimate financial goal.”
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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