What rising home prices mean for your down payment

The housing market has been on a tear since bottoming out after the financial crisis 10 years ago. With little remaining backlog of foreclosed homes and a construction labor shortage handcuffing new housing starts, housing supply hasn’t been able to keep up with demand — particularly in hot coastal markets. The result has been an ever-escalating rise in home prices.

This is great news for people who already own a house, but it’s keeping first-time homebuyers and millennials from entering the market, often hindered by the typical 20 percent down payment needed for a mortgage.

And according to a new report from Zillow, this problem will only get worse. The company’s research estimates that home prices nationwide will rise 3.1 percent over the next year, which will subsequently increase the amount needed for a down payment. For a prospective homebuyer saving monthly for a down payment on a median-priced home ($202,700), this means saving an extra $105 per month on top of what they’re already saving, just to keep up with the rise in home prices.

“Sky-high rents and rising home prices are putting first-time buyers in a bit of a catch-22,” said Svenja Gudell, chief economist at Zillow. "Buying now with a low down payment can be riskier, and the offer may not be considered as competitive by the seller. However, a renter who saves for another year to reach a larger down payment may find that the home they love today is outside their budget a year from now.”

The problem is more pronounced in markets where median home prices are already higher and forecasts suggest a more rapid rise in prices over the next year. In San Francisco, Zillow estimates an additional $192 saved each month to keep up with the rise in home prices. It’s $227 in Portland, OR, $266 in Riverside, CA, $267 in San Diego, and $229 in Las Vegas.

But the two markets where down payments will rise the most are two that are already among the least affordable. In Seattle, prospective homebuyers would need to save an additional $394 each month for a down payment just to keep up with the rise in property values. In San Jose, it’s a whopping $599.

With mortgage rates and monthly payments at relative lows, the down payment has become one of the primary obstacles for renters to owning a home. In a nationwide survey of renters conducted by Zillow in April, 67.9 percent said the down payment was their biggest hurdle for buying a house.

Check out the full report here.