Should Parents Help Children Buy Their First House? 1 in 17 Silver Spooners Do Get Some Help…

Did your parents help you buy your first house? I know that down payment money is not supposed to be “borrowed,” but it can be a cash gift.

Of course, with a Fannie Mae loan, you can put down as little as 3 percent for a down payment, but there are strict limits on the prices of properties.  I think this cute $165,000 1950s ranch in Westwood, Arlington would work. The giant mortgage service company that is publicly traded but also quasi owned by the Federal government went on a quest to find out what kind of assistance young adults get from their parents, and how that assistance impacts their likelihood of buying a home.

We are all bemoaning the drop in homeownership among young adults: since the Real Estate bust, homeownership rates of households headed by 25- to 34-year-olds has fallen by nearly 10 percent, to 36.9 percent in 2014, when it was almost 46 percent in 2006.

Of course, 2006 was the era of easy peasy money, no income documentation loans, etc. It clearly helped young home buyers.

So do kids buy more real estate if mom and dad make it easier to get a loan because they help with the down payment?

Fannie Mae looked at a study by Dowell Myers, Gary Painter, and Julie Zissimopoulos of the University of Southern California. Myers’s team analyzed two sets of data containing information on family income dynamics, including monetary transfers from parents to children, from 1998 to 2004, and again during 2012 to 2013. What they found was interesting but not unexpected: the rich make their kids richer, and help from mom and dad is more likely to happen before age 25.

Only about 6 percent of these adult children who were not already homeowners received a transfer from their parents large enough to contribute substantially to a down payment (defined by the authors as transfers of $2,500 or more in a single year in one data set, and transfers of $5,000 or more over a two-year period in the other data set).

According to the data from one set, transfers were more likely for younger adult children (ages 20 to 24) than older children (ages 25 to 49), which may be because younger children are more likely to still be in college and the transfers were likely intended to cover education expenses. Not surprisingly, transfers were also more than twice as likely for parents in the top 25 percent of the wealth distribution as for parents in the bottom 75 percent.

But do they then use the dough to buy a house? Answer is no.

Myers’s team found that if parents give their kids more than $5000 over two years, the kids are more likely to go out and buy a home. But younger kiddos may be using the money from mom and dad for education, which, as Jon told us, is the real key to home ownership.

Younger children — between the ages of 20 and 24 — are no more likely to become homeowners after the transfer than children of the same age who did not receive a transfer, which might indicate the transfer is for educational expenses. (Ed. note: or credit card debt?)

Children of parents who have less than a high school education are more likely to become homeowners following a transfer than children of parents who are college educated — assuming that the parents in both groups have the same income and wealth.

That’s interesting. So unless you are born with a silver spoon in your mouth, coming from a family in the top 25% of wealth, you are going to have a tough time scooping up enough cash for a down payment on a home. Maybe if your parents didn’t go to college, you are more motivated? The study encouraged enhancing access to mortgages for qualified young buyers: “Children who come from families below the top 25 percent of wealth background are less advantaged in homebuying. To create broader access, and expand the market for home purchases, we can’t just rely on those wealthy parents. Clearly, the nation is benefited by lowering the hurdles of high down payment or other obstacles that may hinder the home purchases by the other 75 percent,” says Dowell Myers.

Well, yes, but then you get back into the same boat we did in 2006: easy money, reckless loans and a bubble that makes home ownership ever more elusive for the middle class. Sigh.

Question for our Realtors: how many Millennials get help from mom and dad in Dallas/Fort Worth when buying a home?