What prevents people from becoming homeowners? The obstacles aren’t as obvious as they may seem. For one in five home buyers, it’s saving up for the 20 percent down payment that proves more difficult than meeting monthly mortgage payments.
On average, saving enough for a 20 percent down payment requires potential home buyers to save more than two thirds of their annual income. That’s a big task, even in parts of the country where median home prices are nearly a third of what they are here in Los Angeles and much of California.
Median home prices in the US are currently $192,500 and are fast approaching $200,000. That means that a family looking to buy a new home must save up $38,500 in cash to qualify for a mortgage. And that doesn’t include other costs like moving expenses and closing fees.
Not surprisingly, some of the largest and most expensive metro areas in the country are located in California. In fact the top four cities where buyers must save or find the largest percentage of their income for a down payment are Los Angeles, San Jose, San Francisco and San Diego.
Here in Los Angeles, buyers must put 182 percent of the average annual income to get to that 20 percent down payment. Let’s break down the numbers. The median Los Angeles home price is $590,000, meaning a traditional down payment will cost you $118,000. If that seems unrealistic keep in mind that number includes all of Los Angeles County. The median income in Los Angeles is $64,806. So as a percentage of income, $118,000 of $64,806 gets you to 182 percent.
Conversely, those looking to buy homes in other parts of the country only have to save up 48 percent of the median annual wage. Those luck potential homeowners are located in Kansas City, Pittsburgh, and Indianapolis.
Of course all of these numbers are based on current mortgage rates, which remain near all time historical lows. If mortgage interest rates go up, then a down payment only becomes more important.
Through government and other assistance programs it is still possible to put down as little as 3.5 percent. However, lower down payments offer an expensive trade-off in higher mortgage rates as well as the added requirement of carrying PMI, or private mortgage insurance. For example, over the lifetime of a $200,000 mortgage, lowering even half a percentage point will save you $20,000.
“Saving enough cash for a down payment is a major barrier to homeownership, especially in expensive markets, where a 20 percent down payment can cost nearly $200,000,” said Jeremy Wacksman, Zillow’s Chief Marketing Officer. “While it’s possible to buy a house with a smaller down payment, 20 percent ensures the best rates. As important as it is to find a monthly payment you can afford, some buyers’ budgets will come down to the amount of cash they can bring to the table.”
Over forty percent of new home buyers are first timers. That means they can’t use the equity in their current home towards their down payment, requiring them to find a large amount of cash to enter the housing market. And they have to do that during a time when rents are sky high. So, it’s no surprise that many first time buyers require a financial gift in order to make their down payment.
Potential home buyers or curious shoppers may want to check out the Zillow® Affordability Calculator. It’s a handy tool to see how much home you can afford based off of income, mortgage rates, insurance and down payment.
If you’re interested in buying or selling a Luxury Home in Los Angeles, please contact us now at 323-829-8811 or email Susan Andrews at susan@luxurylahomes.com.
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