Ramesh Rao Blog December 6, 2023

As interest rates climb, Silicon Valley buyers are putting a larger down payment

Who has $235,183 lying around in a bank account? The average homebuyer in Silicon Valley, apparently. That’s the median down payment for a home in the San Jose metro area — and it’s on the rise.

In the third quarter of 2023, the median down payment in San Jose reached nearly 25% of purchase price, up from 23% in the first quarter, according to data from Realtor.com. In San Francisco, the median down payment increased to 24.4% from 21.8%.

Even with sky-high Bay Area purchase prices, those percentages are higher than anywhere else in the country — and significantly higher than the national average of 14.7%.

“Because interest rates are so high, people want to keep their mortgages affordable,” said Esther Chien, a mortgage officer based in San Jose. “The only way to do that is with a higher down payment.”

Take, for example, a $1.27 million home — the median sales price in the Bay Area. With existing mortgage rates at 7.22%, a down payment of 25%, rather than 20%, would result in a savings of $432 a month. Of course, that means coming to the table with an additional $63,500.

Beyond just the savings of paying up front, a higher down payment can also make a buyer appear less risky to a bank, Chien said. In return, a bank may be willing to offer a discount on interest rates, typically around 0.25%.

Part of the reason that Bay Area buyers can put down so much money up front is because the region offers some of the highest wages in the country — 52% higher than the national average. Many of the region’s tech workers make well above $200,000 — the median salaries at Facebook parent company Meta and Google parent company Alphabet are both reportedly north of $275,000.

“There are higher savings habits here,” Chien said.

Those higher savings are necessary for affording a home here — and it goes without saying that many Bay Area residents have been priced out of the housing market. In the Bay Area, the median down payment is seven times higher than the national median of $30,400. For that amount, a Bay Area homebuyer could put in an all-cash offer on a typical single-family home in Cleveland, Ohio.

And sometimes even savings don’t cut it. A larger infusion of cash may be what it takes to finally buy a home here. Plenty of first-time home buyers make a down payment using a cash gift from a relative, Chien says. Real estate agents here also joke about how each time a major Bay Area tech company goes public, home prices spike as employees use their shares to fund their own initial offers.

Ramesh Rao, a real estate agent specializing in luxury properties around Cupertino and Saratoga — where the median sales price is $3 million — says that his buyers are typically making down payments closer to 40%, and nearly a third of his buyers come with cash-only offers.

“Here, it’s more up-market, rather than a first-time homebuyer’s market,” said Rao. “They have access to more funds, whether it’s stocks or equity in an existing home.”

How much buyers decide to bring to the table depends on their own risk tolerance. A buyer with a portfolio of several investments may decide to put just 10% down on a home, because the stock market could provide returns above the cost of interest on a mortgage. Such was the case during the pandemic when interest rates were low and the stock market was rallying. More conservative buyers may decide to put that money toward a higher down payment, especially if they have savings in the bank that likely aren’t earning enough interest to keep up with inflation.

“It comes down to what each person is comfortable with and what their own goals are,” Chien said.

Some buyers may offer a higher down payment to show sellers they’re serious about closing. But in a housing market as competitive as the Bay Area’s, a higher down payment doesn’t necessarily matter in negotiations, where all-cash offers still hold more weight with sellers, Rao said.

“Even if someone is putting a 40% payment versus all cash, all-cash wins every time,” Rao said. “Sellers don’t like any uncertainty whatsoever.”

Should interest rates cool down — as they are expected to do in 2024 — buyers may not need to offer such a large down payment. But by that time, prices will likely have gone up, so while the percentage of the purchase price may be reduced, it’ll be a greater purchase price overall — evening out any savings.

If there’s one thing we know about prices in the Bay Area, Rao said, “it’s that they go up.”

This article originally appeared on San Jose Mercury News on December 6, 2023 written by Kate Talerico.