Down Payments Motivate Buyers More than Interest Rates | Cross River Real Estate

Changes in down payments have much greater impact on homebuyers’ willingness to buy for a home than changes in mortgage rates and lower down payment increase renters; willingness to buy six times more than existing owners, according to a new study published recently by economists at the New York Federal Reserve.

The survey of buyers and renters found dramatic evidence that the impact of interest rates is highly overrated compared to the impact of even small changes in down payment requirements. The study found that decreasing the required down payment from 20% to 5% increases the willingness to purchase on the average about 15% among all buyers and 40% among renters.  Decreasing interest rate on a 30-year fixed rate mortgage, though it would save the buyer much more than the lower down payment, raised the willingness to purchase a home by only 5% on average.

The study also found that it is primarily the less wealthy respondents (particularly renters) that strongly increase their WTP in response to a lower required down payment, consistent with many of them being severely liquidity-constrained.

As part of the Federal Reserve Bank of New York’s Survey of Consumer Expectations, the economics asked (online) respondents to assume they are to move today to a town/city similar to their current one, and asked how much they would be willing and able to pay for a home similar to the one they currently live in, under four different scenarios.

In the first scenario, all respondents are told they would have to make a 20% down payment, but half the respondents face a mortgage rate of 4.5% while the others face a rate of 6.5%. This first scenario thus made it possible to estimate the importance of mortgage rates by comparing across respondents. In a second scenario, each respondent’s mortgage rate stayed unchanged, but they were allowed to freely choose their down payment, with the restriction that it needs to be at least 5% of the price they are willing to pay. In the third scenario, we respondents’ mortgage rates were switched from 6.5% to 4.5%, or vice-versa. and in the final scenario, our respondents are asked to assume that they just inherited $100,000 in cash, allowing us the economists to study the effect of a (large) non-housing wealth shock on willingness to pay.

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http://www.realestateeconomywatch.com/2015/07/down-payments-motivate-buyers-more-than-interest-rates/