Should the average American have to wait 14 years to purchase a home? A worksheet (.pdf) from the Center for Responsible Lending says that's how long it will take to save up if 20% down payments become standard. With new mortgage banking reforms in place and broad housing finance reform looming, higher down payment requirements seem pretty inevitable. But a number of groups are fighting these changes, as they worry about average Americans coming up with huge chunks of money to buy a home. Does the CRL's 14-year estimate exaggerate the situation?

Questioning the Assumptions to Get 14 Years

To figure how long long a family would need to save, you must make some assumptions. Here's how the CRL calculates 14 years.

• Median 2009 Home Price: \$172,000
• 20% Down Payment (plus closing costs): \$43,025
• Median 2009 Annual Income: \$49,777
• Effective Tax Rate: 20%
• Savings Rate: 7.5%
• Monthly Saving Amount: \$250

From this, it's easy to calculate that saving \$3,000 per year, it takes a little over 14 years to have accumulated \$43,025. But are all of theses assumptions fair?

Income

What could be fairer than using the median income? First, it's important to note that nobody expects home ownership rates to hit 100%. Instead, we should be pretty content to see the rate return to its late-1980s through late-1990s level of around 64%. That means we can take the bottom 36% of wager earners out of the equation. If you do that, then you need to use something closer to the 68th percentile of income to match up to the median home price, since that's the middle between the 36th percentile and the 100th percentile.

Savings Rate

Next how reasonable is it to say that Americans can save 7.5% of their disposable income? On one hand, even now -- when saving is said to be particularly popular following the recession -- Americans are only saving around 5.8% of their disposable income. That might make 7.5% look optimistic, but saving steadily began to decline starting in the late 1980s. The average savings rate during the 1970s and 1980s was actually 9.1%. It sometimes drifted above 11% during the period.

Moreover, it's important to remember that we're talking about the top 64% of wage earners. They can save more easily than the other bottom 36%. So the average savings rate is likely higher for Americans who can afford to buy a home than for the population on a whole. Perhaps even the two-decade average of 9.1% during the 1970s and 1980s underestimates this crowd's ability to save. If Americans are forced to save for bigger down payments to buy a home, then surely their saving rates will approach those levels. A rate of 10% would not be surprising.

Other options

Finally, this analysis assumes that all banks will require 20% down on all mortgages, which is highly unlikely. For starters, the Federal Housing Authority isn't going anywhere. It will continue to provide somewhere around 15% of new home buyers lower down payment mortgages. This shaves off about another 10% of borrowers, which means only the top 54% of wage earners would face 20% down payments, at most.

Moreover, private banks will almost certainly accept some loans with lower down payments -- even without a government backing. They did so voluntarily, even before the subprime craze. Not all loans with lower down payments were backed by the government over the past few decades, so even without such guarantees some institutions will offer lower down payment alternatives.

This could very well turn out to be an area where smaller, community banks thrive. If they understand their customers better than giant megabanks, then they might be able to profitably sell lower down payment loans that they know are safe. They also won't be as worried about any regulatory burden placed on down payments associated with securitization, if they hold all their loans in-house.

Solutions

Finally, there are also a number of solutions that could be thought reduce the burden of 20% down payments, without relying on federal mortgage guarantees. One possibility would be to provide tax-free savings plans to encourage saving and make it accumulate more quickly. New mortgage products could also be adopted that make lower down payment mortgages more attractive to banks. Another strategy could be for the U.S. to adopt monetary policy that allows for higher interest rates, so savings can grow more quickly, increasing consumers' desire to save.

Getting to 20% in Under Six Years

So let's imagine a different calculation utilizing some new assumptions:

• Median 2009 Home Price: \$172,000 (same)
• 20% Down Payment (plus closing costs): \$43,025 (same)
• 2009 68th Percentile Income*: ~\$75,000
• Effective Tax Rate: N/A (if a tax-free savings plan is adopted) or 25%
• Savings Rate: 10.0%
• Monthly Saving Amount: \$625 or \$469

Under these assumptions, it would take under six years to accumulate 20%, if a tax-free savings plan is adopted. That means many people could reasonably own a home by the time they're 30 years old, if so inclined. If you take away the tax-free savings plan and assume a 25% tax rate, then the savings would still be there to support a 20% down payment in under eight years.

As you can see, these exercises are all about the assumptions you make. This alternate calculation implies that putting a 20% down payment standard in place might not be very burdensome to home ownership after all.

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* This is an approximation for the 68th percentile, as I couldn't find single-percentile income data on the Census website. I think this estimate is pretty reasonable, however. We do have Census data for the median of the 61st to the 80th percentile: \$78,694. That's probably about the 70th percentile, so a few percentiles fewer likely gets you to \$75,000.