Thank goodness for down payment gifts.
Adults aged 20-49 who receive financial assistance from their parents are 23% more likely to become homeowners than their peers, according to a University of Southern California (USC) study. This includes any transfer of money of at least $5,000 over the course of two years, which does not necessarily have to be used for a home purchase.
18% of all homebuyers make use of some form of personal gift or loan from family or friends to purchase their home, according to the Federal Reserve Board, as cited in the USC study. The study also cites the National Association of Realtors (NAR), which claims one-in-four first-time homebuyers receive down payment gifts.
Therefore, while it’s certainly possible for homebuyers to buy without the assistance of parents, today’s homeowner population may look very different — perhaps older, as first-time homebuyers would have to save longer, maybe fewer as some may never have purchased — if not for the assistance of parents.
While troubling for all would-be homebuyers with parents either unwilling or unable to contribute, this dynamic is especially influential on minority homebuyers. African-American and Hispanic households in particular are caught in a vicious cycle. The average homeownership rate of African American families is 52%, 20 percentage points less than the average 72% homeownership rate of White families, according to Zillow.
True, down payment gifts seem to promote a higher homeownership rate, especially among young, first-time homebuyers. But is it a safe trend for the housing market?
The trouble with low down payments
What’s wrong with down payment gifts?
Down payments are necessary to show the lender the homebuyer has skin in the game. The wisdom is that homebuyers are less likely to default if they have invested a substantial chunk of cash in the home. However, the homebuyer still lacks skin in the game when the down payment is sufficient due to a financial gift, but it’s not actually the homebuyer’s money to begin with.
29% of U.S. mortgages originated at the end of the first quarter (Q1) of 2015 had a down payment of 3% or less, according to RealtyTrac. This share is down substantially from the 2009 peak when the share was near 50%. But, when 18% of homebuyers already receive gifts to cover some or all of their down payments, it’s too high for comfort.
So, yes. We can thank down payment gifts for helping more renters become homeowners, which boosts California’s already-low homeownership rate — the second lowest in the nation at 53.4% as of Q2 2016. But lest we forget what happened immediately following the peak of low- and no down payments (the foreclosure crisis), we ought to treat down payment gifts with caution.