The requirement of a 20 percent down payment is the biggest obstacle to buying a home, especially among renters these days, according to a new study by the New York Federal Reserve.
The “willingness to pay” (WTP) for a home hinges heavily on a reduction in the downpayment, while the interest rate on the mortgage product being sought has a lesser impact.
In a survey, potential homebuyers were divided into to groups. In the first scenario, all households must make a 20 percent down payment. In the second scenario, their down payment can be as low as 5 percent of the purchase price.
“Based on these scenarios, we find that on average, WTP increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price, instead of having to put down 20 percent,” writes Andreas Fuster and Basit Zafar for the New York Fed. Comparatively, a lower mortgage rate only increased WTP by about 5 percent.
While almost half the respondents do not change their WTP (willingness to pay) at all when the required down payment is lowered, many respondents increase their WTP very strongly in the second scenario with the lower down payment requirement.
“This is particularly true for respondents who are current renters (and often relatively less wealthy): their WTP on average increases by more than 40 percent,” they said.
They also tend to choose lower down payment fractions than current owners; for instance, 59 percent of renters, but only 36 percent of owners, choose a down payment fraction of 10 percent or lower.