The Bank of Mom and Dad is playing a growing role as lender of last resort for a housing recovery struggling to provide more traction for the U.S. economy.
Last year, 27 percent of those purchasing a home for the first time received a cash gift from relatives or friends to come up with a down payment, according to data from the National Association of Realtors. That’s up from 24 percent in 2012 and matches the highest share since the group began keeping records in 2009.
Those numbers will probably keep growing this year as younger Americans remain constrained by student debt, tough entry into the job market and stricter mortgage-lending rules that require more cash up front. At the same time, rising stock and property values give their baby boomer parents the ability to assist those wanting to lock in near record-low borrowing costs.
“Without them, the recovery’s not sustainable,” said Anika Khan, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Anything that gets more money into first-time buyers’ hands “just moves the housing recovery along,” she said.
The inability to come up with the down payment was the top reason for renting rather than buying property, according to the Federal Reserve’s report on the 2013 economic well-being of households issued in July. The report also showed 10 percent of those leasing apartments last year were looking to buy a house.
Student Loans
Fifty-four percent of first-time buyers in 2013 said their purchases were delayed because the burden of student loans prevented them from saving enough for a down payment, according to the NAR survey. First-time buyers accounted for 29 percent of previously-owned home purchases in July, compared with about 40 percent historically, data from the agents’ group show.
Deborah Baisden, a Realtor with Prudential Towne Realty in Virginia Beach, Virginia, is witness to the pickup in cash gifts, particularly among parents assisting their children.
“We’re finding more and more parents are gifting money,” Baisden said. “Because of student debt and because of kids having a tough time finding jobs, it’s becoming increasingly difficult for them to be able to buy homes — we’re turning into a country of renters.”
Paychecks are also shrinking for younger Americans. College graduates from 18 to 34 years old working full-time experienced a $3,300 drop in average annual earnings adjusted for inflation from 2007 to 2012, according to a Progressive Policy Institute analysis of Census Bureau data.
Investor Interest
Younger buyers have also had to compete with an influx of investors scooping up properties — often with all-cash offers. As fewer deals and less inventory prompt investors to retreat, the field may soon open up for first-time buyers as sellers look to expand the market, said Lawrence Yun, NAR’s chief economist.
“With the investors stepping away, for some first-time buyers and millennial buyers, they have less competition,” Yun said. “So it would be an opportune time to enter the market.”
Cash gifts appear to be “happening even to a greater extent this year,” he said. NAR will release 2014 survey data on Nov. 3.
Amanda Woolley, 31, got a little family help to close on a two-bedroom home in Seattle in July. She accepted about half the cash she needed for the down payment and closing costs from her parents, although she’d rather have done it on her own.
‘Really Resistant’
“I was really resistant — I actually didn’t want to take any money from them,” said Woolley, who is seeing this first-hand as a communications manager at real-estate website Zillow Inc. “But after looking at all the programs and looking at what my mortgage payment would be, it actually made the most sense to take a little bit from them.”
A surge in equities is helping boost the wealth of would-be cash donors. The Standard & Poor’s 500 Index closed at a record yesterday and has advanced 8.8 percent so far in 2014, building on a 30 percent rise last year and 13 percent in 2012.
The boomers have seen their retirement savings almost double since the end of the recession. They had an average $147,700 in their 401(k) accounts in June, up from $76,500 five years earlier when the economic slump ended, according to data compiled by Fidelity Investments.
Young people’s “ability to save up a down payment is much more difficult today than it was in previous generations,” said David Stevens, chief executive officer of the Mortgage Bankers Association in Washington. “It’s an uneven recovery because a lot of the personal wealth that’s being created is by people who have homes currently or who have money in the stock market. Younger borrowers have neither, so they’re not a beneficiary of this recovery as much as the boomer generation.”
Probate Process
With their wealth rebuilding, some of those older Americans would rather decide for themselves how it’s doled out and see their offspring enjoy the benefits now while they’re still around rather than leave it to the vagaries of the probate process.
“You have greater control over how that money’s dispersed, who it goes to for what purpose,” said Greg McBride, senior financial analyst for Bankrate Inc. in North Palm Beach, Florida. “After you’re gone, you don’t,” he said. “The other uncertainty is, you don’t know what the estate laws are going to be like when your time is up.”
According to the Internal Revenue Service, each spouse can make a gift of $14,000 to a child or other individual and be excluded from paying taxes.
Current property owners are also benefiting from home-price appreciation that has helped recover losses following the market’s bust. Home values have climbed 24.1 percent since their trough in 2012, according to the S&P/Case-Shiller nationwide index.
Income Inequality
One drawback of greater reliance on cash gifts is that it will probably worsen wealth inequality, said Nicolas Retsinas, director emeritus of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts, and a member of the Freddie Mac board of directors.
“If this trend were to continue over time, I believe there would be a further distance between, for example, the homeownership rates of minorities versus non-minorities,” said Retsinas. “Minorities’ parents are probably less likely to own a home and therefore less likely to have built up the cash reserves that would be an important component of these larger down payments.”
The homeownership rate among blacks was 43.1 percent in 2013 and 46.1 percent among Hispanics, Census Bureau figures show. For whites, the rate was 69.6 percent.
The increase in such cash gifts also has lenders on guard against unstable sources of down payment funds.
Paper Trail
“The regulatory agencies are very, very specific about the paper trail requirements,” said Staci Titsworth, a regional loan officer in Pittsburgh who works in the mortgage division of PNC Financial Services Group Inc. “It truly needs to be a gift with no expectation to repay, because once expectation to repay comes into the equation, now you’ve got borrowed funds for down payment, which is unacceptable.”
PNC, as with other lenders such as Regions Financial Corp. and BB&T Corp., requires that the gift be from a relative by blood or marriage, with few exceptions. A “gift letter” with the mortgage application typically must include the amount of the gift, date the funds were transferred, donor’s basic identification and relationship to the buyer, and a statement that no repayment is expected, according to representatives of the three banks.
Financial institutions are careful about determining the source of funds because, while mortgages secured with the help of gifts from family are about as sound as those without any help, gifts linked to the seller were found to have increased default rates during the housing crisis, according to data from the Federal Housing Administration. Gifts from the seller are now banned by the agency.