The average buyer down-payment has fallen to a two year low, while home buyer demand has increased for the third week running, all while the Fed has hit us with yet another rate hike. This is the market brew.

Down-Payments Have Fallen Nationwide

The typical down payment for homeowners throughout the US has fallen 10% since this time last year. This is the lowest it has been in nearly two years, and currently averages about 10% of the sales price. This is significant, for two reasons.

First off, higher interest rates coupled with current home prices are stretching the limits of what potential buyers can afford. Although median home prices have fallen nationwide approximately 10% from their peak in May 2022, they are only down about 1.5% on average from where they were a year ago. However, in that same time, interest rates have increased substantially.

Secondly, although it is still very much a sellers’ market, it does not lean so heavily as it did a year ago. This gives buyers back a lot of power that they lost during the peak of the market. When placing competing offers on homes, the down-payment is a major factor in whether you are presenting a strong offer. With less buyer competition, many buyers feel as if they can present weaker offers without fear of being outbid. But buyer demand has been increasing.

Buyer Demand Has Increased 3 Weeks In a Row

With the fallout of Silicone Valley Bank, mortgage rates dropped last week, which helped to boost home-buyer demand for the third week in a row. Although the seasonal percentage of purchase mortgages were up 2% last week, compared to this time last year, the total demand is still down a whopping 36%.

Prior to the banking collapse, rates appeared to be heading to over 7%. Many buyers likely saw the rates continue to climb prior to last week and continued to hold off entering the marketplace. But with the failures of Silicon Valley Bank and Signature Bank, many buyers saw a brief respite with modest mortgage rate declines to around 6.5%. It will be curious to see if buyer demand remains strong should interest rates again start to climb.

It does appear that buyers are becoming more accustomed to the higher rates. February broke a yearlong streak of month-to-month declining home sales. From January to February, the number of home sales actually increased 14.5%. Although this is a good start, sales are still down 22.6% from their February 2022 levels. This is positive movement for the real estate market as a whole, and will likely only slow down entering the Spring buying season if rates were to continue to increase.

The Just Feds Announced Another Rate Hike

And on that note. The Fed just announced yet another rate hike. On Wednesday, the Federal Open Market Committee voted unanimously to raise the federal funds rate by a quarter percent, to a target range of 4.75% to 5%. This rate sets what banks charge each other for overnight lending, but feeds through to a multitude of consumer debt, like mortgages, auto loans, and credit cards.

The Fed made no comment whether there will be any further rate increases on the horizon, but in their statement, they have departed from their previous wording of “ongoing increases”, which at least implies that these rate hikes are nearing an end. However, as with any Fed decisions, only time will tell.

As to how this will affect the real estate market in the long term, we really need to wait and see. Over the short term, this should decrease the number of both buyers and sellers in the marketplace. As rates increase, less buyers can afford to buy into the current marketplace. Sellers are equally unwilling to enter the market, as many refinanced their current homes over the past two years, and are unwilling to trade their historically low rates for a brand-new mortgage over 6%.