Is a 20% down-payment realistic today?

[siggy_freud]

Hey all,

I read a lot of threads on here regarding home buying. In almost every circumstance the default recommendation is "save at least a 20% down payment before you buy." Seems like sound advice, as ultimately it reduces your interest, prevents you from having PMI, and makes you more secure.

But I started thinking about how realistic that is today, as opposed to say . . . 30 years ago. Given how home prices have risen relative to income, is 20% still where the measure should be?

In 1984 (30 years ago) the median US household income was $20,948. Adjust for inflation to 2012 that's $47,181.

In 1984 the median new home cost was right around $80,000. As a percentage of income that's roughly 381% of ones salary in 1984.

In 2012 the median income was $50,099, or adjust for inflation in 2012 $51,017. The median new home cost in 2012 was about $242,000. As a percentage of income that's roughly 483%.

So in 30 years houses have gone up nearly 20% relative to ones income.

All that said, is a 20% down payment still feasible for the average person, or are we pushing more people towards delayed ownership/prolonged renting?

Another way to look at it. A 80k house in 1984 would be about $182,000 in today's dollars. So we've seen the median price in houses rise about 25% in that time, yet income only rise 7.6%.

Just some thoughts I've had, and obviously I'm interested in what yours are.

[bjl584]

You're looking at median income and home prices. Not actual income and home prices. A lot of people make more. A lot of people buy cheaper homes.

I bought my first home about 9 years ago. It cost $104,000. I put down 20% and was earning about $40,000 at the time. It was more than doable for me. I sold that house in 2011 for $110,000. It still would have been realistic for me to buy with 20% down had I been the buyer and not the seller.

So, yes. I think that it is entirely realistic to put 20% down so long as you buy within your means. The bank pre approved me for something like $190,000. Had I listened to the bank and maxed out, then 20% would have been out of reach.

[ua_guy]

Yes and no; It's sound financial advice, but I think it really depends on the geographical location of the market. There are some markets where buying your way in is preposterous. Think San Francisco, New York City, even parts of Seattle are increasingly un-affordable and will significantly prolong the time to save a recommended 20%, and it's forcing younger buyers and those with fewer financial resources out of those markets.

[Weird Tolkienish Figure]

Hey all,

I read a lot of threads on here regarding home buying. In almost every circumstance the default recommendation is "save at least a 20% down payment before you buy." Seems like sound advice, as ultimately it reduces your interest, prevents you from having PMI, and makes you more secure.

But I started thinking about how realistic that is today, as opposed to say . . . 30 years ago. Given how home prices have risen relative to income, is 20% still where the measure should be?

In 1984 (30 years ago) the median US household income was $20,948. Adjust for inflation to 2012 that's $47,181.

In 1984 the median new home cost was right around $80,000. As a percentage of income that's roughly 381% of ones salary in 1984.

In 2012 the median income was $50,099, or adjust for inflation in 2012 $51,017. The median new home cost in 2012 was about $242,000. As a percentage of income that's roughly 483%.

So in 30 years houses have gone up nearly 20% relative to ones income.

All that said, is a 20% down payment still feasible for the average person, or are we pushing more people towards delayed ownership/prolonged renting?

Another way to look at it. A 80k house in 1984 would be about $182,000 in today's dollars. So we've seen the median price in houses rise about 25% in that time, yet income only rise 7.6%.

Just some thoughts I've had, and obviously I'm interested in what yours are.

Depends on the market, but there's nothing magical about 20%.

Edit: it's good advice but I don't think it's a necessity.

Just don't buy during a bubble, and if you do, 20% might not even be enough to save you if the market ever collapses.

[JoeP]

Sure it is possible. You can do it more quickly if you have fewer expenses, and if you live in an area with a lower cost of living.

Think of it this way: a couple renting may have 2 car loans, a student loan, and credit card debt. If those total, say, $1000 a month, that is $12k a year they are not putting toward a down payment. If they had the foresight to avoid being in debt, or limit the debt to just the student loan, they would be in better shape to save.

[siggy_freud]

You're looking at median income and home prices. Not actual income and home prices. A lot of people make more. A lot of people buy cheaper homes.

So does buying within your means nowadays essentially mean that a median income person needs to buy a less-than median price home?

Your argument swings both ways too. A lot of people make less than the median wage. I'm not sure I see the difference between median prices and actual prices. Median prices are based on something . . .

I guess my main point was that as home prices are seeming to rise some 3-4x quicker in comparison to the increase in salary, at what point does the expectation for a 20% down payment become less realistic? There are a lot of places where 100,000 doesn't buy you much.

[Singuy]

There's something magical about 20% down. NO PMI. This is money you throw away until you hit 20% of what you owe. If you put 3% down, this will take you a long time before you can get out of your PMI(unless your house increase in value and you refinance, but refianancing is also not cheap).

[MonkeyMama]

I am from San Francisco, and I personally would not buy a home without at least 20% down. That doesn't change due to the cost of living. If anything, the downside of buying beyound your means is exaberated in higher cost regions.

Thoughts:

--I have no idea why renting while you save up 20% is a bad thing. So, it takes 10-15 years. One of my most financially conservative friends saved up over 15 years for her first home. In this day and age, people want everything now. I've seen a lot of complaints about saving up a whole year or two for a home. I don't *get* that on any level.

--The flip side of my last statement? Renting was even more insane than buying a modest apartment, so we felt it was of high priority to buy a condo ASAP. We actually did not save very long for our first home. Our first home was $260k. That was probably about the top of our means at the time. The down payment was saved while we made $10k - $30k annual incomes. It helped to double up. We did put 20% down. IF it took a year or two longer, so be it. NO way in heck would I have bought so quickly if I were single. It was easier to rent a room in a house for a few hundred bucks a month as a single person. So, I wouldn't have been motivated to buy, and couldn't have afforded it anyway. (Though given some time - years - I could have easily saved up the down payment on a $30k salary).

We bougth a condo we felt comfortable raising kids in, because we didn't know if we could ever afford anything more than that.

I've watched way too many friends purchase homes they could not afford in the slightest, with very little down. Being able to save up 20% down is a good litmus test in general. IF you can save 20%, you are better off than 99% of the homeowners that I know. You know how to save money and to make home ownership a priority. We moved somewhere cheaper eventually, but the foreclosure rate in our current city is absurd. Kind of ironic because of the lower cost of living. But in San Fran it's a way of life. Everything else gets sacrificed so you can have that roof over your head. This is why we don't spend much money on cars. This is why we have never borrowed for anything aside from a mortgage. We couldn't afford *Any* debt with the average starter house costing $500,000. I don't know anyone back home who has lost a home to foreclosure. Here, the price of real estate doubled in a couple of years and everyone bought anyway because of all the creative financing and 0-down loans, with little thought of actually how to afford these homes for the long run. (Literally almost everyone we know age 20-50 has lost their home to foreclosure, in current city).

There are always exception to the rule. I have no doubt some people bought without 20% down and have done just fine. I just don't personally know a single person in that boat. It's a rare exception, particularly in higher cost regions I guess.

Short answer: If it's important to you, you figure it out.

[MonkeyMama]

There's something magical about 20% down. NO PMI. This is money you throw away until you hit 20% of what you owe. If you put 3% down, this will take you a long time before you can get out of your PMI(unless your house increase in value and you refinance, but refianancing is also not cheap).

I believe this was probably our personal motivation to putting 20% down. Much better loan terms, in general, in addition to no PMI.

[humandraydel]

So does buying within your means nowadays essentially mean that a median income person needs to buy a less-than median price home?

The "median" house size is also larger than it was 30 years ago. And the mentality of the "median" person in 'merica is that they NEED that larger house - but do they?

I absolutely believe that 20% down is very possible, except maybe in some high CoL locations. It will obviously take several (5-7) years and I think most people don't want to wait that long.

[disneysteve]

The "median" house size is also larger than it was 30 years ago. And the mentality of the "median" person in 'merica is that they NEED that larger house - but do they?

Exactly what I was going to say. You aren't comparing apples to apples when you look at data from 1984 until now. The market has changed significantly.

Yes, 20% is still very reasonable and achievable IF you are buying within your means. Somebody making $20,948 in 1984 had no business spending $80,000 on a home. By the same measure, someone making $50,099 in 2012 shouldn't have bought a home costing $242,000. In both cases, those individuals would have been overextending themselves. Your home purchase price should be 2.5 to 3 times income.

Using median numbers is really meaningless because those are very broad national figures but incomes vary dramatically from place to place and home prices vary dramatically from place to place. You really need to focus on one specific geographic location - one zip code even - if you want to try and make a meaningful comparison.

[HappySaver]

Absolutely! It's a great litmus test. If you aren't able to save 20%, you can't afford the house!

We've done it twice. At today's high prices. And it feels GREAT to put down that down-payment and not worry about PMI or being underwater with every little market drop.

[LivingAlmostLarge]

Yes but like MM people don't want to wait. And in HCOLA probably the best thing to do is get in early and ride the equity and pay a small mortgage on a one bedroom or two bedroom with roommates.

In HCOLA where people's down payments are the cost of homes in other areas, often times the houses are above the 2-3x income and the mortgages are often 50% of take home pay. It has to happen because rents are expensive period.

What to do? In HCOLA people scrounge everything else and pay mortgage first, then everything else happens. All of my friends rode out Southern CA bust on expensive homes and they are still paying. But long term it'll be okay. The houses were not cheap and not large. Certainly most were 3/2 1400 sq ft. But what else could they do? They drive old cars, don't eat out, and honestly live pretty frugally. Same where I am now, with the exception of people who make A LOT of money and seriously can afford anything they want.

[bjl584]

So does buying within your means nowadays essentially mean that a median income person needs to buy a less-than median price home?

Your argument swings both ways too. A lot of people make less than the median wage. I'm not sure I see the difference between median prices and actual prices. Median prices are based on something . . .

I guess my main point was that as home prices are seeming to rise some 3-4x quicker in comparison to the increase in salary, at what point does the expectation for a 20% down payment become less realistic? There are a lot of places where 100,000 doesn't buy you much.

In statistics the median is the value that separates the higher numbers from the lower numbers. It's the middle. But, it's pretty broad and doesn't tell you much. As stated in another post you need to look at specific areas and markets.

Yes, there are people that make less, but the rules stay the same. Buy a house that is no more than 2.5 to 3 times your income with 20% down and you will be fine. I think that it was stated by Monkeymomma; we live in an instant gratification society where everyone wants everything right now. No one wants to wait to save up the 20% down payment. So what if it takes 5, 10, or 15 years? People need to have patience if they are going to make a sound financial decision when buying a home. There is also no need to buy a 4000 square foot home either. Most people don't need that much space. Smaller home = cheaper price tag.

[JoeP]

There is also no need to buy a 4000 square foot home either. Most people don't need that much space. Smaller home = cheaper price tag.

And usually: smaller energy bills, less to furnish/paint/clean, lower taxes...