Starter home prices are growing almost seven times faster than renter incomes, making what was likely already the biggest challenge for first-time home buyers ― saving for a down payment ― even more difficult. But there is good news for today’s first-time buyers: With mortgage rates near record lows, monthly payments can remain affordable even with a smaller down payment, and flexible work options are providing new opportunities for many to buy a home in a less-expensive city.
If an average renter household saves 10% of its income ― an aggressive target given the average renter savings rate is 2.4% ― it would take about six years and five months to save enough for a 20% down payment on today’s typical starter home, worth about $148,500. That’s a full year longer than it would have taken to save for a down payment on a starter home five years ago, a new Zillow® analysis indicates. And as prices rise at a record pace, it may take even longer for today’s renters to save up for tomorrow’s homes.
“Without the equity from a previous home sale, first-time home buyers face more challenges in coming up with a down payment,” says Zillow economic data analyst Nicole Bachaud. “In a housing market where prices are rising at record rates, especially when compared to renter incomes, the ever-increasing sum of a 20% down payment can feel out of reach. The good news is that buyers who want to take advantage of today’s low mortgage rates can do so without putting a full 20% down ― most conventional mortgages allow as little as 3% to 5%. That lower upfront payment comes with higher monthly payments, but the opportunity to build equity can outweigh those extra costs for many.”
Prices for even the most affordable homes are rising quickly. As of May, homes priced in the bottom third of a given metro area, often thought of as starter homes for first-time buyers, are growing faster than the typical mid-market home in 42 of the 50 largest U.S. metro areas. Those who are just starting to save may need to factor in this rapid pace of home value growth. Zillow forecasts 14.9% appreciation over the next year, which would mean renters need to save an additional $369 per month just to keep up.
Renters in California face the biggest barriers to saving for down payments. San Francisco renters earn nearly twice as much money as the typical U.S. renter, yet home prices are so high that it would take 17 years and five months ― 11 years longer than the national average ― to save enough to put 20% down on a local starter home. It would take even longer in Los Angeles and San Diego. Among the top 50 metro areas, renters in Birmingham, Memphis and Detroit could save for a down payment the fastest.
While this may seem daunting, it’s possible to secure a mortgage while putting less than 20% down. In fact, a majority (64%) of first-time buyers do so, and one-quarter put down 5% or less.i Renters can save up a 10% down payment on a typical starter home after three years and three months, and accruing a 5% down payment would take only a year and seven months.
A smaller down payment, of course, comes with tradeoffs on the monthly mortgage payment, such as the private mortgage insurance lenders often require borrowers to carry. At today’s rates, the mortgage payment on a typical starter home with 20% down would be $501, while a 5% down payment would be $730 ― still only 18.9% of a typical renter’s monthly income, well below the 30% rule of thumb for housing affordability. Buyers may decide the benefits of homeownership and the chance to build equity sooner outweigh the additional housing cost burden each month.
The new freedom for many to work remotely and live anywhere as part of the Great Reshuffling may also help many renters move into homeownership, as renters in high-cost areas can more easily save for a home in a less expensive locale. A typical San Francisco renter, if able to do their job remotely, could save enough for a 20% down payment on a starter home in Austin in about six years and eight months, and a similar home in Phoenix in five years and seven months. A similar renter in Boston could save enough for a 20% down payment on a starter home in Miami in half the time it would take for a local starter home ― six and a half years, instead of 13 years. On the other hand, a typical renter in Austin hoping to make a move to San Francisco would need to save for 28 years and three months.
Because of differences in incomes and the lingering impacts of historical inequities, it is more difficult for Black and Latinx renters to come up with a down payment on their first home. It would take six years and one month for a white renter earning the median income, and four and a half years for an Asian American renter earning the median income to save for a 20% down payment on a starter home, compared with nine years and seven months for a Black renter, and seven years and eight months for a Latinx renter.
Black and Latinx home buyers are more likely than white home buyers to say they saved at least part of their down payment themselvesii ― which could be a possible consequence of the racial wealth gap, as Black and Latinx buyers are often less able to rely on family to help out financially. Along with structural barriers such as less access to credit and higher rates of mortgage-application denials, this is a contributing factor to the racial homeownership gap.
|Years to Save for a Down Payment on|
a Starter Home (10% savings rate)
|Metro Area*||Typical Home|
Value for a Starter
|20% Down||10% Down||5% Down||20%|
|New York, NY||$346,426||11.7||5.9||2.9||$1,686||$2,131||$2,220|
|Los Angeles, CA||$562,810||17.6||8.8||4.4||$2,309||$3,031||$3,177|
|Dallas–Fort Worth, TX||$206,828||7.4||3.7||1.8||$1,136||$1,401||$1,455|
|Miami–Fort Lauderdale, FL||$199,601||8.3||4.1||2.1||$980||$1,237||$1,288|
|San Francisco, CA||$846,415||17.4||8.7||4.4||$3,470||$4,557||$4,776|
|Minneapolis–St. Paul, MN||$249,454||10.3||5.2||2.6||$1,197||$1,518||$1,582|
|San Diego, CA||$555,114||17.9||9.0||4.5||$2,305||$3,018||$3,161|
|St. Louis, MO||$109,997||5.3||2.7||1.3||$552||$694||$722|
|San Antonio, TX||$160,885||7.2||3.6||1.8||$862||$1,069||$1,110|
|Kansas City, MO||$142,629||6.0||3.0||1.5||$713||$896||$933|
|Las Vegas, NV||$245,552||11.0||5.5||2.8||$1,041||$1,356||$1,419|
|San Jose, CA||$940,490||16.6||8.3||4.1||$3,802||$5,009||$5,253|
|Virginia Beach, VA||$190,730||8.0||4.0||2.0||$854||$1,099||$1,148|
|Oklahoma City, OK||$112,498||5.8||2.9||1.5||$572||$716||$745|
|New Orleans, LA||$155,339||9.0||4.5||2.3||$743||$942||$982|
|Salt Lake City, UT||$372,094||13.7||6.9||3.4||$1,550||$2,027||$2,124|
*Table ordered by market size
**Total monthly payments assume a 3% mortgage rate, including property taxes, insurance and PMI for down payments of less than 20%