Changes in down payment requirements have more influence over home buyers’ willingness to buy than changes in mortgage rates, according to a new study published by economists at the New York Federal Reserve.
Federal Reserve Bank of New York’s Survey of Consumer Expectations found evidence that buyers and renters 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.
A key takeaway is that the effect of a change in down payment requirements on housing demand strongly depends on households’ financial situation. For instance, a loosening of down payment requirements will have little effect on the willingness to purchase for a new home of current owners with substantial equity, or of renters with substantial liquid savings. The results also imply that macroprudential measures such as a loan-to-value (LTV) cap may predominantly affect the lower end of the housing market, and that the effect on house prices will depend on the state of the economy and other asset markets,” said economists Andreas Fuster and Basit Zafar of the New York Federal Reserve.