Down payment gifts to adult children are quite common in the United States, especially among young adults, and a recent study reveals just how prevalent they really are.
Young adults enter the economy with low wealth and income, and often struggle with student debt. These obstacles make the process of saving to buy a house long. But parents, who are at the peak of their wealth and income, sometimes choose to transfer money to their children to ease minimum down payment requirements.
31% of young adult home buyers aged 25 to 44 received down payment gifts from 2009 to 2016, as shown in a recent study by the Consumer Finance Protection Bureau (CFPB). The average down payment received was $ 48,000.
Without down payment gifts, the homeownership rate decreases considerably. Imagine if the 31% of young homebuyers who received a down payment and bought between 2009 and 2016 were forced to delay homeownership because they had to save for a down payment. For reference, the homeownership rate for 18-44 year olds only declined by around 15% between the third quarter (Q3) of 2006, when homeownership peaked, and the second. quarter of 2016, when homeownership was at its lowest here in California. This comparison illustrates the important contribution of parental transfers to the homeownership rate.
Thus, down payment gifts are an essential basis for homeownership.
However, having wealthy parents to contribute down payment is also decreasing. savings rate. Households with wealthier parents are also willing to buy earlier. When they do, they tend to have more loan-to-value ratios (LTV). The age of first purchase drops from 37.5 to 33, and children of wealthier parents are more likely to purchase larger homes as their first residence.
On the flip side, parental transfers also account for 30% of the homeownership gap between blacks and whites, as the study shows. In the United States, young white households are twice as likely to be homeowners as black households of the same age.
The report presents three main takeaways:
- parental transfers make a significant contribution to the homeownership rate of young adults;
- home ownership is less attractive without down payment donations; and
- Down payment donations are the primary driver of the correlation between parental wealth and housing outcomes.
Parental transfers prevent ‘the skin in the game’
While these parental down payments promote a higher rate of home ownership among young people, they still contain pitfalls.
As indicated in the study, access to down payment assistance from well-off parents translates into a decrease in the need to build up savings, a necessary step to demonstrate to a lender that the buyer has his or her own. personal account. skin in the game. When the money is theirs, homebuyers facing financial difficulties are less willing to default because they have invested their own savings in their home.
The ability to meet the traditional 20% down payment requirement has declined as jobs in California were hit during the 2020 recession. Jobs are now 9.3% or 1.7 million below peak before the recession reached in December 2019.
With fewer jobs available, fewer Californians are eligible for a mortgage. The reliance on family members to help with down payments doesn’t seem to be going away anytime soon. Although personal savings peaked at record highs in 2020 and are still high in March 2021 due to the lawsuit stimulus injections, without access to employment, many home buyers will be overwhelmed and unable to meet down payment requirements.
One way to overcome the barriers that first-time home buyers face in saving for a down payment is to create a down payment savings program for first-time buyers. first tuesday advocated for a tax-deductible savings program for first-time homebuyers, which has the potential to narrow the homeownership gap between white and black households. Much like a retirement account, this type of savings program will allow tenants to save more quickly, by setting aside dedicated, tax-free contributions for their first home purchase.
While this is not yet a reality for Californians, real estate professionals can encourage first-time home buyers by targeting rental communities with marketing materials aimed at prospective buyers who are still in the economy phase.
Down payment donations boost homeownership, but at what cost?