How $15k in Down Payment Assistance Could Help Millions Achieve Homeownership

By Alexandra Lee on Mar. 16, 2021

• 9.3 million (27.4%) U.S. renter households could theoretically afford the local monthly mortgage payment for the median home sold in 2020 in their metro. 
• Almost two-thirds of renters (63%) from 20 major metro areas cited affording the down payment as a barrier to buying a home. A $15,000 tax credit could potentially count toward the entire minimum down payment in 40 of the 50 largest metros.
• Utilization of this tax credit by Black and Latinx households could be tempered by racial inequities in income.

More than a quarter of U.S. renters could theoretically afford the monthly mortgage payment on the typical home in their area — if only they had enough cash saved for even a minimal down payment. A $15,000 tax credit for first-time home buyers like that proposed by President Joe Biden during his 2020 presidential campaign would be sufficient to fully cover that minimum down payment in a majority of the nation’s largest metros.

The past year has thrown the precarity and importance of housing into sharp relief, with many households — especially renters — facing intense pressures to maintain their housing situations as the pandemic and its economic fallout have ground on. But even before the pandemic, renters were at a housing affordability disadvantage compared to their home owning peers, spending far more of their incomes on rent than homeowners spent on mortgages. Helping more of these renting households transition into homeownership would not only reduce their housing cost burden, it would also enable them to access the tremendous wealth-building advantages of homeownership for themselves and future generations. 

But while record-low interest rates have eased the barrier to homeownership somewhat, major hurdles remain — most notably, saving an adequate down payment. Two-thirds of renters across 20 major metro areas surveyed by Zillow cited affording a down payment as the biggest hurdle to buying a home. The challenge is especially acute in the face of rapidly rising home values — a boon to homeowners, but a burden for those trying to save enough to hit a target today that may be inadequate tomorrow as prices keep rising. In light of these challenges, ideas have been floated around the introduction of legislation that would create a refundable, advanceable tax credit of up to $15,000 for first time homebuyers, similar to first-time homebuyer credits approved by Congress during the Great Recession. Unlike those credits, the recently proposed advanceable tax credit could be used at the time of purchase, which could jumpstart potential homebuyers lacking in down payment savings. 

Affordability, in Need of Savings

Underscoring the importance of down payment assistance is the fact that a large share of renters across many major U.S. metros could, at least on paper, already reasonably afford the typical monthly mortgage payment on a home in their metro. Assuming a 3.5% down payment — the minimum required for an FHA-insured mortgage — on a 30-year, fixed-rate mortgage at 3% interest, about 9.3 million renter households (27.4%) nationwide could cover the monthly payment for the median home sold in their metro in 2020 without spending more than 30% of their income (above which a household is considered “housing cost burdened”). 

Around 40% of renters in relatively more affordable Midwest metros including Pittsburgh (40.5%), Cincinnati (39.7%), Cleveland (39.0%) and St. Louis (38.5%) could theoretically afford a local mortgage payment. Costly California metros have the smallest share of renters that could afford a local mortgage, but the share is still not negligible — 10.1% in Los Angeles, 12.1% in San Jose, 12.8% in San Diego, and 16.3% in San Francisco.

Even assuming a lighter housing cost burden, many renter households could still afford a mortgage on the median priced home. The median renter spends less than 30% of their income on housing (28.9% nationally), but the median homeowner spends less still (20.2% nationally). Assuming renter households were to spend no more of their income on a mortgage than the typical homeowner in their metro does, about 4.7 million (13.9%) U.S. renter households could afford a mortgage. Around 20% of renter households in Virginia Beach (23.1%), Birmingham (18.8%), and Pittsburgh(18.4%) could afford the monthly mortgage payment without spending more than their local home owning peers. 

The problem, then, is not necessarily with the monthly costs of homeownership — the challenge lies in the difficulty renters have in saving enough to even begin thinking about homeownership in the first place. Moody’s Analytics estimates that renter households save 2.4% of their income per year — at that rate, it would take the typical U.S. renter 14 years to save $15,000, and potentially longer in some areas. An immediate $15,000 credit could push these renters years ahead toward homebuying.

In fact, in many more-affordable metros, a $15,000 credit on its own would be a large enough sum to cover the entire minimum down payment for the typical local home. A 3.5% down payment on the median home sold in 2020 amounted to less than $15,000 in 40 of the nation’s largest 50 metros. And in 30 of those metros, $15,000 would be enough to cover a somewhat larger 5% down payment, helping renters build equity even faster. 

Systemic Inequities

It’s clear that a program like this would help many renter households make the jump into homeownership. But the renter households best-positioned to benefit from any proposed credit are those already closest to being able to buy themselves, without assistance. These better-primed renter households could afford a local monthly mortgage payment, would have enough in savings to cover the other costs associated with buying and would have adequate credit and employment histories. But structural inequities along all these dimensions (income, savings, credit) mean that the renter households that stand to benefit most from this kind of down payment assistance may be disproportionately white and well-off. 

Looking only at income across all of the 50 largest metros, white households make up a significantly larger share of households that could mathematically afford the local monthly mortgage payment when compared to the share of renter households overall, a difference statistically significant at the 5% level. Asian households also fare relatively well — in almost all metros (48 of 50) they make up a slightly larger share of potential buyers than the overall share. But in almost all of these same areas, Black (49 of 50 metros) and Latinx (42 of 50 metros) renter households make up a disproportionately smaller share of potential buyers. 

Los Angeles, San Francisco, and New York have the most unequal representation of white households among potential buyers. In Los Angeles, White households make up 32.6% of renters, but 53.0% of potential buyers — a difference of 20 percentage points. That gap is mirrored in the shortfall of Hispanic households, who make up 41.7% of renters but just 21.1% of potential buyers.

Breaking Cycles

To break this cycle of systemic inequity in housing, policymakers may have to look past a flat tax credit for all households. Prior research shows how expanding access to credit could shrink the homeownership race gap. Other policy proposals that could alleviate racial disparities might also place disadvantaged households in a better financial position to consider purchasing a home.

Finally, it should be broadly assumed that down payment assistance and other policies meant to make homeownership more accessible will ultimately contribute to more demand from potential home buyers — at a time when housing demand overall is already sky-high. This strong demand, coupled with inventory that has remained low, is contributing to rapidly rising prices and very swift sales activity — especially for the most-affordable homes likely to be sought by first-time buyers. Our research shows that sales can continue to grow in this environment and the market can accommodate more buyers, in part as technology enables faster and more efficient connections between buyers and sellers. However, continued boosts in demand without similar increases in supply risks leaving many would-be buyers on the sidelines, potentially outbid by better-qualified or faster-acting peers and/or unable to find a home they can afford in an area where they want to live.

Methodology

Renters household income data was sourced from 2019 1-Year American Community Survey microdata, accessed via IPUMS. Zillow calculated the monthly payment on the median home sale price across 2020, assuming a 3.5% down payment, a mortgage rate of 3%, a mortgage insurance premium of 0.7%, and including metro-level estimates of insurance and property tax rates. 

Proportions of renters and potential buyers by race are compared in a two-proportion z-test. Only statistically significant differences at the 5% level are reported in the discussion of metros with disproportionate potential buyers by race.