Down payments and financial constraints play a big part in shaping housing demand, particularly among lower-income home buyers, according to a study by the Federal Reserve Bank of New York. But low mortgage rates don't influence buyers to make a move as much as mortgage qualification requirements do, the study finds.
New York Fed researchers asked home owners how much they were willing to pay for a home comparable to their current one, using several financing scenarios, such as different down-payment constraints, mortgage rates, and non-housing wealth.
The researchers found that low down-payment requirements had large effects on how much people were willing to pay for a home, especially among lower-income and credit-constrained borrowers. For example, renters' willingness to pay more for a home rose 40 percent when down-payment requirements were lowered from 20 percent to 5 percent, according to the study.
"This result implies that regulatory policy that targets loan-to-value mortgage qualification requirements will have the largest impacts on the most credit-constrained buyers, in particular younger renters with lower wealth," writes Robert Dietz, vice president of tax and market analysis at the National Association of Home Builders, on the trade group’s blog.
Researchers also found that non-housing wealth served as a major motivator to buy. A $100,000 increase in non-housing wealth boosted a person's willingness to pay more for a home by 10 percent on average. The effect was found to be four times higher for renters.
On the flip side, home buyers are less price-sensitive to changes in mortgage rates, according to the study. Researchers found that changing the mortgage rate by 2 percentage points would only have a 5 percent impact on housing prices in what buyers are willing to pay.
Source: “The Sensitivity of Housing Demand to Financing Conditions: Evidence From a Survey,” Federal Reserve Bank of New York (November 2014) and “New Research Highlights Finance Constraints on Housing Demand,” National Association of Home Builders Eye on Housing Blog (Jan. 19, 2015)