Zillow's 1% Down Payment

August 28, 2023

THE BIG SPLASH

Zillow's 1% Down Payment

Zillow has stepped up to tackle the sky-high costs of the housing market by introducing a 1% down payment option for potential homebuyers.

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  • With mortgage rates soaring and affordability becoming a concern, Zillow's new program aims to ease the financial burden.

  • Right now, it's available to eligible buyers in Arizona, with plans to roll it out to other states soon.

  • Zillow's Home Loans division has crunched the numbers and found that this 1% down payment option could significantly speed up the process of saving for a down payment.

  • For instance, if someone earning 80% of the median income in Phoenix, Arizona, wanted to buy a $275,000 home, they'd only need 11 months to save up for the down payment. In contrast, saving for a 3% down payment would take over two years.

  • While the 1% down payment might sound like a game-changer, it doesn't completely solve the issue. Smaller down payments result in higher monthly mortgage payments, as borrowers take on more debt.

  • This move comes as part of a wider effort to address the housing affordability crisis, but it's clear that the road to affordability is a complex one. As long as interest rates remain elevated and home prices stay high, the struggle for affordable housing will persist.

A SCOOP OF ANALYSIS

The US housing market finds itself in a persistent chill, grappling with high mortgage rates and a scarcity of homes for sale.

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  • Fannie Mae economists foresee this icy standstill possibly extending into 2024, irrespective of whether the economy avoids recession.

  • Existing home sales have already slipped by 2.2% in July compared to the previous month, hitting an annual rate of 4.07 million units.

  • The surge in mortgage rates, reaching 7.23% for the popular 30-year fixed mortgage, plays a major role in the sales slowdown.

  • This rate is a stark contrast to the pre-pandemic average of 3.9% and marks the highest since 2001.

  • As mortgage rates rise, affordability dwindles, and the limited supply of homes worsens the situation. The number of available homes dropped by over 9% YoY and 46% from pre-pandemic levels.

  • This double-edged sword of high rates and scarce homes paints a gloomy picture for 2023 home sales. Fannie Mae economists predict sales will remain near the lowest annual level since 2009. Even if a recession is avoided, housing affordability will remain elusive due to limited supply.

A SCOOP OF TINY HOMES

Living large in tiny spaces: Three individuals share their experiences of residing in under 300 square feet, as they navigate the high costs of living in desirable locations.

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  • The soaring rents and dwindling "starter home" options are pushing young Americans to embrace downsizing. CNBC Make It recently featured three such individuals, shedding light on their compact living.

  • Alex Verhaeg, a 23-year-old barber, bike messenger, and content creator, found his 95 square-foot Manhattan apartment in 2020 for $1,000 a month.

  • Sung Yoo, aged 40, traded most of her belongings for a 140 square-foot Santa Monica tiny home costing $1,600 a month.

  • Precious Price, who originally owned a 1,400-square-foot Atlanta house, built a $35,000 tiny home in her backyard, renting out her larger house and living rent-free.

  • From a closet-sized apartment to a snug tiny home, these individuals have creatively designed their spaces to make them feel comfortable and functional.

  • It's a growing trend driven by necessity and a desire to lead a more intentional, minimalistic lifestyle, proving that living large doesn't always mean having a large living space.

A SCOOP OF OPINIONS

Billionaire investors are sounding the alarm, saying it's time to "sell real estate." Charlie Munger, Kevin O'Leary, and Elon Musk are pointing out the challenges.

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  • Office spaces are struggling, with many properties facing issues; shopping centers, office buildings, and more are in distress.

  • Rising interest rates are expected to cause cap rates to expand, leading to lower property values. Additionally, the banking crisis might make refinancing difficult for landlords.

  • However, amidst the pessimism, there's nuance to consider. The impact of the office sector's decline may not fully translate to other property sectors. While work-from-home trends hurt office spaces, they're benefiting areas like self-storage, suburban apartments, and single-family rentals.

  • The banking crisis's effects are limited and won't have a significant impact on most landlords, especially those in the REIT sector. Strong REIT balance sheets, government support, and alternative capital sources counterbalance these concerns.

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