The challenges facing prospective buyers of the least expensive homes are getting harder to overcome.
Already beset by stagnant wages, student debt and competition from investors who are snapping up listings, those looking to purchase moderately priced houses must also provide more cash up front.
The median down payment for the cheapest 25 percent of properties sold in 2013 was $9,480 compared with $6,037 in 2007, the last year of the previous economic expansion, according to data from 25 of the largest metro areas compiled by Seattle-based Redfin.
The higher bar is a symptom of still-tight credit that is crowding out first-time buyers even as interest rates remain near historical lows.
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Younger adults, who would normally be making initial forays into real estate, are among those most affected, weakening the foundations of the housing market and limiting its contribution to economic growth.
“The numbers tell the story of why we have millions of potential homeowners who are renters or living with their parents,” said Susan Wachter, a professor at the University of Pennsylvania’s Wharton School. “What has changed is the ability to become an owner. And that’s changed through a down payment that’s more than doubled.”
The median down payment for the cheapest 25 percent of homes was 7.5 percent of the sales price last year, up from a 3.1 percent low in 2006 and compared with an average 4.2 percent from 2001 through 2007, according to Redfin.
For properties in the middle 50 percent, the share rose to 8.8 percent in 2013 from an average 8.2 percent in the seven years leading to the last recession.
One reason for the jump is that fewer first-time buyers are applying for loans backed by the Federal Housing Administration, which require smaller down payments, after the government agency boosted mortgage-insurance premiums, said Malcolm Hollensteiner, the director of retail lending products for the U.S. unit of Canada’s Toronto-Dominion Bank.
In 2013, 39 percent of first-time buyers used FHA loans, which generally require 3.5 percent down, compared with 56 percent in 2010, according to data from the National Association of Realtors (NAR).
Banks have “become much tighter on credit, even on government-backed mortgages,” said Dean Maki, chief U.S. economist at Barclays in New York. This has made it “harder for first-time buyers and others with limited credit histories,” he said.
Iris Garcia, 35, has seen firsthand how the bar has been raised. She and her husband hope to close next month on a $239,000 four-bedroom “fixer-upper” on the north side of Chicago with their four children.
The couple came up with 15 percent down to win the bid, after losing out on another property to an all-cash investor.
“A few years ago that would have been different,” Garcia said of the upfront payment. “Just with everything that’s been going on in the market, that was the safe way to go.”
Stricter lending, while crowding out market participants, might mean a healthier crop of homeowners and reduced probability of another crash, said Gary Rogers, a regional vice president for the NAR. Putting more money down probably means fewer owners will owe more than their properties are worth should prices drop.
“If there is a downturn, houses are still going to be more liquid than they were before when people were buying with zero and 3.5 percent down,” Rogers said. “The liquidity of housing is going to be improved as time goes on because of this trend, and I think that’s a really great buffer.”
First-time purchasers accounted for 28 percent of all sales of previously owned homes in June, compared with about 40 percent historically, NAR data show. A dearth of first-time buyers is pushing down the national homeownership rate, which fell in the second quarter to its lowest level since 1995, according to Census Bureau data.
The economy won’t get back to its pre-recession growth rate without more first-time homebuyers, whose entry helps boost construction and spending on durable goods such as furniture and appliances, said Wharton’s Wachter.