To Buyers, Mortgage Rates May Be Overrated

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.

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The Fed’s survey of buyers and renters found that the impact of interest rates may be overrated compared to the even the smallest changes in down payment requirements. The study found that dropping the required down payment from 20 percent to 5 percent increases the willingness to purchase, on average, by 15 percent among buyers and 40 percent among renters.

On the other hand, decreasing the interest rate on a 30-year fixed-rate mortgage raised the willingness to purchase a home by only 5 percent, on average. Buyers showed more influence by down payment changes even though the mortgage rate change could save them more money than the lower down payment.

“A key takeaway is that the effect of a change in down payment requirements on housing demand strongly depends on households’ financial situation,” says economists Andreas Fuster and Basit Zafar of the New York Federal Reserve. “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,”

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