Is Zillow’s 1% Down Payment Program a Blessing or a Curse for Struggling Homebuyers?

In the face of skyrocketing mortgage rates, Zillow, the renowned online property marketplace, unveiled an enticing offer. The company is proposing a mere 1% down payment on homes, a move aimed at attracting struggling buyers in Arizona.

However, this seemingly attractive scheme raised eyebrows among experts who fear it could be the catalyst for another credit crunch.

The U.S. mortgage rates have recently hit a staggering 22-year high. This surge means that prospective homeowners are now grappling with mortgages that cost an additional $1,000 per month compared to what they would have paid two years ago.

Amidst this financial turmoil, Zillow’s initiative has been lauded for its potential to help more people climb onto the property ladder. However, critics argue it could burden individuals with more debt than they can manage, potentially leading to a wave of defaults reminiscent of the 2008 credit crunch.

Mortgage rates just hit a 22 year high. More #Bidenomics in action. Thanks, Joe! Mortgage rates were at a twenty year low when Biden entered office. pic.twitter.com/sFW6feWcwW

— Clay Travis (@ClayTravis) August 17, 2023

To put things into perspective, the average rate on a conventional 30-year fixed-rate mortgage leaped to 7.31% last week, up from 7.16% the previous week, as reported by The Mortgage Bankers Association (MBA).

Meanwhile, the average U.S. house prices have soared to $416,100 by the end of the second quarter of 2023. A buyer securing a mortgage of this size with a 1% down payment would face repayments of $2,996-a-month for a 30-year mortgage, or $3,383 for a 20-year mortgage.

Zillow’s proposal encourages first-time buyers in Arizona to make this minimal down payment to ‘lower the barrier to entry and make the dream of owning a home a reality.’

Under this scheme, an eligible buyer pays just 1% toward a down payment and receives an additional 2% at closing, bringing the total to 3% – the typical minimum payment required for a conventional home loan.

Orphe Divounguy, Zillow Home Loans’ senior macroeconomist, stated the scheme aims to assist more people with purchasing a home. He noted for those who can afford higher rent payments but are deterred by the upfront costs associated with homeownership, down payment assistance can help lower the barrier to entry.

The 30-yr mortgage rate just hit the highest level in over 20 years and could push the housing market into collapse.

These high rates could eventually break the system. pic.twitter.com/6IeVyDUkbD

— Michael Burry Stock Tracker ♟ (@burrytracker) August 23, 2023

However, the rapid rise in rents and home values means many renters already burdened with high monthly housing costs may not have enough saved up for a large down payment. While these types of programs are innovative in lowering potential barriers to homeownership, they also pose significant risks.

Surging mortgage rates have sidelined many aspiring homeowners, with applications plummeting to a 28-year low, according to the MBA. Zillow’s offering aims to widen the net of eligibility for first-time homeowners, but it could have adverse effects on the economy.

Applicants with the incredibly low down payment could easily fall into the trap of taking on more debt than they can afford. A change in their financial circumstances or a future stretch of inflation that pushes interest rates high could result in them losing their home and defaulting on payments.

As such, while Zillow’s 1% down payment scheme may seem like a lifeline for struggling homebuyers, it could potentially lead to a precarious financial situation reminiscent of past economic crises.

This article appeared in The Record Daily and has been published here with permission.