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, N.C. 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 that 10 percent of those leasing apartments last year were looking to buy a house.
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, Va., 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.
Gifts from family are one way the housing market is adapting to less freely flowing credit, said Stuart Miller, chief executive officer of Miami-based Lennar Corp., the second-biggest U.S. homebuilder by stock-market value.
“The barriers are high, and over time the market adjusts to those barriers,” Miller said in a Sept.17 earnings call. “People start saving more for a down payment. They find a way. They get help from family. They start focusing on credit statistics as rental rates go up.”
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.
“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 Thursday 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.”
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.