When Down Payments Grow On Family Trees

giving treeWhen people buy a place, I’m always curious where their down payments come from although, being polite, I don’t ask. In her wrap-up of her apartment hunting in London series, though, Jess Furseth gets to the heart of the matter and acknowledges that she, like so many people her age, got help from her parents:

Independence will get you nowhere.
This one was a surprise to me, considering how buying your own place is considered a very “adult” thing to do. But unless you are lucky enough to be, well, loaded, you may well find yourself relying on other people to a surprising extent during the process.

The post-recession lending climate means you need a giant deposit [down payment], and after paying London rents for a decade, that came from my parents. So did the money to buy a new sofa after the furnishing budget disappeared, thanks to the bank cutting its lending amount.

She is in the majority — the super-majority, even. According to Time, “Three out of four young adults who recently bought their first home needed their parents’ help to afford the down payment, closing costs or other expenses.” 

Of course, there are repercussions:

even as young adults expect more assistance from their parents, the older generation has a dwindling amount of resources they can use to help. Over the past five years, just under three-quarters of parents who helped their kids buy homes used their savings, but that number is expected to fall to about two-thirds in the future, according to the survey. Instead, more parents will refinance their own homes, take out personal loans and borrow against their 401(k)s — potentially risking their own financial security.

And parents are digging deeper into their pockets to help out in other ways, too: Almost a third say they’ll pay some of their kids’ other expenses to help the younger generation save money, and 18% plan to help their kids pay down their student loans. Of the parents who are contributing to their kids’ investments, half say they’ll help their kids make the down payment, 20% say they’ll help with closing costs and 20% say they’ll actually co-sign the loan.

This is enough of an issue that an article on CNBC cautions parents against helping their kids with down payments at all:

There are several categories of gifts that advisors caution against. The first is help with a down payment. Parents who provide a down payment outright may be facilitating home buying before their children have the maturity that comes with saving for it.

Helping with a bigger down payment has other problems. “If children are buying a house and counting on help from Mom and Dad, then it’s probably a house they can’t afford,” Barrett at Bill Few Associates said.

That seems extreme to me. I know plenty of financially savvy, responsible people who have gotten their first apartments, usually a “starter” home, with the backing of Mom & Dad. Is that so different than parents subsidizing other big ticket items like their children’s college education? Assuming they’re able to.

But there are also racial elements to this, as a recent impassioned Op-Ed in the Washington Post pointed out.

Do you know what’s also an example of “I GOT MINE”? Gentrification. (As in houses, neighborhoods, cities.) It’s “I got my apartment because I can afford the rent and you no longer can, no matter how long you’ve lived here.” Or “I got my house because my parents (grandparents, et al.) helped with the down payment because they bought their first house in, say, Chevy Chase, for a song and sold it for quadruple, while blacks either couldn’t get financing or were kept out through restrictive covenants or customs.” …

For everybody who recalls the hard work and sacrifice of their parents or grandparents, and all the ways they’ve had to struggle to make their way in this world, I hear you. I do not doubt the heart and authenticity of those success narratives. I just ask that you also understand those narratives simply do not hold true for huge swaths of your fellow Americans.

The playing field is not, and has never been, level.

From World War II through the 2007 housing crash, real estate was a primary way families built wealth. My colleague Emily Badger points out that for decades, the Federal Housing Administration held separate and unequal mortgage standards for black and white neighborhoods, giving government sanction to the practice of redlining, which undercut black property values and helped create ghettos.

On the other hand, if all young adults held out until we ourselves could afford down payments as well as closing costs, fees, and mortgage payments, far fewer of us would buy property. In big cities, it would be “nearly impossible,” according to Business Insider.

[A researcher] looked at 30 large US cities, using their local median incomes and median home prices. It assumed that young households could accomplish the tough feat of saving 5% of their income, year after year, through bouts of unemployment, illness, shopping sprees, family expansions, or extended vacations.

The results are stunning – if just a tad discouraging for first-time buyers.

In my beloved and crazy boom-and-bust town of San Francisco, where a median home (for example, a two-bedroom no-view apartment in a so-so neighborhood) costs $1 million, it would take – are you ready? – 37 effing years.

Given its higher median income, San Francisco is only in second place. The winner by a few months is another Bay Area city, San Jose. In San Diego, it would take 33 years. In Los Angeles, 32 years. First-time buyers might be retired before they scrape their theoretical down payment together.

Presumably that would be a loss for society at large, though how large I can’t say. Would the nation be significantly worse off if most of us stayed renters for decades?

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