New York Fed: Down Payment Size Key Factor in Housing Demand

The size of a down payment is much more significant than the interest rate in determining how much more someone is willing to pay for a house, according to researchers at the Federal Reserve Bank of New York. For lower-income households and those who currently rent, reducing the size of the down payment produces much bigger increases in willingness to pay.

The study found that when the loan-to-value ratio rises from 80 to 95 percent, the average household was willing to pay 15 percent more for a home. Almost half of respondents did not report being willing to pay any more, however, while others reported willingness to pay significantly more. Renters reported being willing to pay more than 40 percent more on average, and the reduced down payment made about a quarter of renters willing to pay at least twice as much.

By comparison, the reduction of a mortgage rate by 200 basis points increased the amount people were willing to pay by about 5 percent on average, with little variation across categories of respondents. The findings indicate that “liquidity constraints play a substantial role in individuals’ willingness and ability to pay for a home,” the researchers wrote, while “[t]he price of available financing … may play a less important role than commonly thought.”