Borrowers pick lower down payments over lower rates

Low mortgage rates don’t influence buyers to make a move as much as mortgage qualification requirements do, according to a new study by the Federal Reserve Bank of New York.

Down payments and financial constraints play a bigger part in shaping housing demand, particularly among lower-income homebuyers, the study showed.

New York Fed researchers asked homeowners 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 a larger influence 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.

On the flip side, homebuyers 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.

“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,” wrote Robert Dietz, vice president of tax and market analysis at the National Association of Home Builders.

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.