Down payment gifts to adult children are quite common in the U.S., especially among young adults, and a recent study reveals how widespread they really are.

Young adults enter the economy with low wealth and income, and are often saddled with student debt. These obstacles make saving to buy a house a long process. But parents, who are at their peak of wealth and income, sometimes choose to transfer money to their children to alleviate minimum down payment requirements.

31% of young adult homebuyers aged 25-44 received down payment gifts from 2009-2016, as found in a recent study from the Consumer Finance Protection Bureau (CFPB). The average amount of down payment assistance received was $48,000.

Without down payment gifts, the homeownership rate decreases dramatically. Imagine if the 31% of young homebuyers who received a down payment gift and purchased from 2009-2016 were forced to delay homeownership as they were required to save up for a down payment. For reference, the homeownership rate for 18-44-year-olds only decreased by about 15% between the third quarter (Q3) of 2006 when homeownership peaked, and Q2 2016 when homeownership was at its lowest here in California. This comparison illustrates the vast contributions parental transfers make to the homeownership rate.

Thus, down payment gifts are a critical foundation for homeownership.

However, having wealthy parents to contribute to down payment funds also decreases savings rates. Households with wealthier parents are also willing to buy sooner. When they do, they tend to have higher loan-to-value (LTV) ratios. The age of first purchase decreases from 37.5 to 33 and children of wealthier parents are more likely to buy larger homes as their first residence.

On the flip side, parental transfers also account for 30% of the Black-White homeownership gap, as found in the study. In the U.S., young White households are twice as likely to be homeowners as are similarly aged Black households.

The report presents three main takeaways:

  • parental transfers greatly contribute to the homeownership rate of young adults;
  • homeownership is less attractive without down payment gifts; and
  • down payment gifts are the main driver behind the correlation between parent wealth and housing outcomes.

Parent transfers prevent “skin in the game”

While these down payment gifts from parents promote a higher homeownership rate among the young, they still contain pitfalls.

As indicated in the study, access to down payment assistance from wealthy relatives results in a decreased necessity to muster savings, which are a necessary step in demonstrating to a lender that the buyer has their own personal skin in the game. When the cash is their own, homebuyers facing financial distress are less willing to default since they have invested their own savings into their home.

The ability to meet the traditional 20% down payment requirement has dwindled as California jobs took a hit during the 2020 recession. Jobs are now 9.3% or 1.7 million below the pre-recession peak reached in December 2019.

With fewer jobs available, fewer Californians qualify for a mortgage. The reliance on family members to help assist with down payments does not appear to be going away anytime soon. Though personal savings peaked at record levels in 2020, and are still high as of March 2021 due to continued stimulus injections, without access to jobs, many homebuyers will be burdened and unable to meet down payment requirements.

One way to address the obstacles first-time homebuyers face in saving up for a down payment is the creation of a down payment savings program for first-time homebuyers. firsttuesday has advocated for a tax deductible savings program for first-time homebuyers, which has the potential to decrease the homeownership gap between White and Black households. Much like a retirement account, this type of savings program will allow renters to save up more quickly, setting aside dedicated, tax-free contributions to their first home purchase.

While not yet a reality for Californians, real estate professionals can encourage first-time homebuyers by targeting rental communities with marketing materials geared toward future homebuyers who are still in the saving stage.

Related article:

Down payment gifts boost homeownership, but at what cost?