US mortgage rates have indeed reached 22-year highs; the national average 30-year fixed mortgage rate is 7.59%, and the 15-year fixed mortgage rate is 6.86%, creating a challenging environment for potential homebuyers. In response to this situation, Zillow Group, Inc., an online property trading platform headquartered in Washington, has recently introduced an offer allowing buyers to make a 1% down payment on homes. The intention behind this offer is to assist struggling buyers in achieving their dream of homeownership, according to Zillow.
Citing to an analysis by Zillow Home Loans, the company said, ” . . . shows that by reducing the down payment burden to 1% of the purchase price, a homebuyer looking to purchase a $275,000 home in Phoenix, Arizona, who makes 80% of their area’s median income and saves 5% of their income would only need 11 months to save for the down payment.”
As the average rate on a conventional 30-year fixed-rate mortgage escalated to a staggering 7.31%, Zillow’s strategy appears timely, offering to minimize the initial payment of purchasing a home. By targeting Arizona, the company seeks to broaden accessibility to the property market. This initiative, praised for its goal of helping individuals constrained by initial payment, is also under criticism. However, this initiative has sparked discussions about the potential ramifications it might entail.
Critics argue that, as long as interest rates stay high while home prices remain elevated, the affordability picture will not improve, and this 1% down payment scheme could inadvertently set the stage for a menacing credit crisis echoing the 2008 recession. By saddling buyers with debt, the potential for defaults looms large, thereby rattling the stability of the economy. While hailed as innovative in lowering barriers, the initiative also courts the risk of entrapping buyers in a cycle of debt and instability.
Let’s consider a 2008 recession scenario in this context.
Imagine a potential homebuyer considering a $300,000 house. With high interest rates at 7% on a 30-year fixed-rate mortgage, their monthly payment would be approximately $1,995. Now, let’s assume that due to the 1% down payment scheme, they only need to put down $3,000 upfront. However, if home prices remain elevated, the actual cost of the house might not decrease significantly.
Now, fast forward a few years. If the housing market experiences a downturn, and the value of the home drops by 10%, the house is now worth $270,000. If the homeowner, who only put down 1%, is suddenly faced with financial challenges and needs to sell the house, they may struggle to cover the remaining mortgage balance.
This scenario can lead to a cycle of negative consequences. As more homeowners struggle to sell their houses for the remaining loan amount, this could flood the market with distressed properties. The increased supply of homes can further drive down home values, leading to a wave of defaults and foreclosures.
With widespread defaults, financial institutions that hold these mortgages could face significant losses, similar to what happened during the 2008 recession. The credit market could freeze up, making it harder for individuals and businesses to secure loans, ultimately affecting economic stability.
But, Orphe Divounguy, Zillow Home Loans’ senior macroeconomist, defends the program, asserting that it empowers renters to transition into homeownership. With rising rents and home values, prospective buyers often struggle to amass substantial down payments.
“For those who can afford higher rent payments but have been held back by the upfront costs associated with homeownership, down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,” Divounguy said.
Now is the time when overall economic landscape seems far from stable. Surging mortgage rates have led to a drastic drop in applications, potentially foreshadowing a broader economic slowdown. With this context, Zillow’s 1% down payment offer has sparked questions about whether it’s a silver bullet solution or a potential harbinger of new financial turmoil.
However, this effort, as Divounguy says, to democratize ownership could be a potential remedy, granting access to those previously sidelined by financial constraints given the central bank stops raising interest rates and the housing market stabilizes.
