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Summary: In a previous blog post, we noted how home prices in the Seattle-Tacoma-Bellevue metro area have risen at a much faster pace than household incomes, though there was a slight lull in price appreciation from mid-2018 to mid-2019. This trend could cause more and more Seattle-area home buyers to use down payment gifts in 2020.
It can be difficult to come up with a few thousand dollars in one lump sum to be used as a down payment to buy a home. Especially in centers like the Seattle area where home prices are very high, down payment amounts can be very high and subsequently difficult to gather.
But accepting monetary gifts from family can be one way to reduce the upfront expense associated with a purchase.
Seattle Home Prices Outpace Income Growth
From 1998 to 2018, the median household income for the Seattle metro area rose by 76.2%. That was higher than the national average. But home prices in the area climbed by around 177% during that same 20-year period. As a result, the overall affordability of the Seattle real estate market has declined over the years.
Related: Seattle home prices report
This trend has occurred in many U.S. cities. In cities and towns across the nation, home prices have outpaced income growth over the past two decades. As a result, some home buyers struggle to come up with funds needed for a down payment. The bottom line is that it has become harder for a person with an average or typical income for Seattle to buy a home in the area.
While home prices in Seattle slowed down and even dipped a year and a half ago, they are starting to climb back up.
Some Millennials Struggle to ‘Enter Homeownership’
This trend presents a challenge for millennials in particular (loosely defined as those individuals born between 1982 and 2004).
According to Skylar Olsen, an economist who works for Zillow:
“The simple fact that home values have far outpaced income growth, lengthening the time needed to save for a down payment, contributes to millennials’ struggles to enter homeownership.”
She added that “that there are many options for mortgages requiring less than 20 percent down.”
There is a misconception out there that buyers have to put down at least 20% when purchasing a property. But the average investment is actually well below that level, and some mortgage programs allow for a down payment as low as 3%.
As a result of home-price growth outpacing incomes, we could see a higher percentage of home buyers using down payments gifts in 2020.
Down Payment Gifts to the Rescue?
With home prices outpacing income growth, it’s likely that more and more home buyers will rely on down payment gifts to come up with their initial investment.
In fact, a recent housing-industry survey showed that 30% of home buyers get help from relatives and/or friends in the form of gift money. Most of the mortgage programs available today allow for these down payment gifts. So it’s a great way for cash-strapped borrowers to come up with the minimum required investment on a home purchase.
In most down-payment gift scenarios, the person donating the money must provide a letter that says they do not expect repayment. In other words, they must attest that the money is truly a gift — and not a personal loan. Aside from that simple requirement, there aren’t any extra “hoops” to jump through.
House Values in Seattle Area
Home buyers planning to enter the Seattle real estate market in 2020 might take comfort from another recent trend. House values in the area dipped for a while, following a long stretch of double-digit annual gains.
Not long ago, we were blogging about double-digit home price gains occurring within the Seattle metro area. But appreciation has slowed since then. When this article was published in April 2020, the median home value in Seattle had dipped, but started steadily increasing again. Over the past 12 months, the average home price in Seattle inched up just 0.7%, though they are expected to pick up the pace over the next year and increase by 3.7%.
Given this information, buyers in Seattle may want to jump into the market early to ride the wave of price appreciation and avoid getting stuck paying more for their home in the near future.
Do You Have Mortgage Questions?
Are you thinking of buying a home in Seattle? Do you have questions about mortgages to finance your purchase? Sammamish Mortgage can help. We are a local, family-owned company that has been serving the Seattle area since 1992 and offer many mortgage programs to borrowers in Washington, Oregon, Colorado, and Idaho. Please contact us if you have financing-related questions, or if you’d like to receive a loan estimate.