The Incredible Shrinking Down Payment

By Kenneth R. Harney
Saturday, February 10, 2007

Does anybody remember the old days when home buyers actually made sizable down payments, often 20 percent or more, when they bought their first house?

New national research reveals just how dated and quaint that concept has become, because of rocketing home prices that have far eclipsed buyers' incomes and savings.

From mid-2005 to mid-2006, according to a statistical sampling of a representative group of 7,548 purchasers, nearly half of all first-time buyers financed the entire transaction, obtaining mortgages in the full amount of the home price. Another 30 percent put down 10 percent or less, and 20 percent put down 5 percent or less.

The research was conducted by the National Association of Realtors, using information on home transactions supplied by Experian, a major credit and realty data firm. The median down payment of first-time purchasers, according to the study, was just 2 percent. In other words, the median-size mortgage for first-timers represented 98 percent of the home purchase price.

The highest loan-to-value ratios for first-time buyers were in the South, where the median mortgage amount was 100 percent of the sale price. In the West, the median was 99 percent; in the Midwest 98 percent; and in the East 96 percent.

By comparison, the typical repeat home buyer nationwide invested a median 16 percent as a down payment to purchase a replacement home, usually from the proceeds of a prior sale, and financed the remaining 84 percent.

Where did first-time buyers obtain the money for even their modest down payments? Seventy-three percent of the survey respondents said at least part of it came from savings accounts, and 22 percent said relatives or friends chipped in as well. One in 10 said their down payment came from liquidations of stocks or bonds.

The biggest down payment resources for repeat buyers were the profits they made from prior sales. Sixty-two percent of repeat buyers depended on those resources. But 40 percent also took money from savings accounts to help swing the deal, and 6 percent sold stocks or bonds. Just 3 percent got help from relatives or friends.

Besides high prices, a key reason for the relatively high levels of leverage being used by both first-time and repeat buyers has been the explosion of low-down-payment options by mortgage lenders and insurers in recent years.

Prior to the mid-1980s, the plain-vanilla, 20-percent-down mortgage was almost the only game in town. Now, 100 percent financing -- often using a "piggyback" arrangement that combines a first mortgage of 80 or 90 percent of the home value combined with a second mortgage or credit line for 20 or 10 percent -- is common. So are 5 and 10 percent down payment conventional loans with private mortgage insurance, and 3 percent down payment Federal Housing Administration loans.

Although these minimal-down plans have been highly successful in pushing the homeownership rate in the United States to record heights -- currently just under 69 percent -- that's happened in an atmosphere of steadily appreciating home prices and values. Since the mid-1990s, the possibility of low or no appreciation hasn't been a concern for buyers using minimal down payments in most parts of the country. That's because if you could obtain a loan that got you into a house with almost no money down, there was no problem: Appreciation, sometimes at double-digit annual rates, would take care of you from then on.

But that's no longer the case. Buyers who made small down payments in 2005 and 2006 face a starkly different prospect: They started with minimal or no equity, and they may still be in the same position. Worse yet, they could be temporarily "upside down" on their mortgages, with a principal balance greater than their current home value.

The unknown about minimal down payment loans is how they perform in flat or depreciating market conditions. People who bought in hyper-appreciating markets could be vulnerable financially if they have to sell on short notice because of a job transfer or they can no longer handle the monthly payments.

Leverage in real estate slices both ways. A minimal investment can produce impressive returns if the appreciation tide is rising. But it can also expose you to a negative-equity situation when the tide recedes.

The jury is still out on how well highly leveraged recent buyers from 2003-2006 will handle a period of slow growth in their home values. Can they hang on until appreciation returns and raises their equity holdings? The mortgage and real estate industries -- to say nothing of the Wall Street bond investors who've financed trillions of dollars' worth of these loans -- are banking on it.

Kenneth R. Harney's e-mail address is

© 2007 The Washington Post Company