Parents - and other relatives - will always try to help their kids, and many parents globally have helped their children with one of the biggest obstacles to buying a home: the down payment. 79% of Americans between the ages of 18 and 29 had assistance from their parents when becoming a first time homeowner. One has to wonder if someone putting down 3% is truly qualified to buy a home and pick up the unforeseen repair payments that are inevitable over time. These days especially, the bigger the down payment, the better off buyers are to weather the sharply higher mortgage interest rates.
In the UK, for example, parents accounted for 72% of family members contributing to first-time buyer deposits in the year through July 2023, down from 74% in 2021, and down from 80% in 2018, as new homebuyers increasingly call on siblings to help them pull together a deposit. Is the well of 'parent cash' drying up? Here are some thoughts:
1. The excess savings some accumulated during the COVID era - combined with some benefiting from government stimulus - is whittling away.
2. Inflation has eroded purchasing power, more so for those whose incomes have not risen as sharply, causing relatives to use savings to make up the difference.
3. Parents who moved to lower cost cities and states are experiencing higher rates of inflation with high demand and more limited supply as these areas catch up to this new demand, with their cheaper cost-of-living rising, further eroding savings.
4. Many parents are able to spend on things like travel again and they are spending lavishly.
BUT, parent's wealth is also being fueled by:
1. Parents moving to lower taxed states/cities have more disposable money. Including money they can gift their kids.
2. Older generations are significantly wealthier than younger generations. Baby boomers control about 53% of US wealth, the Silent Generation about 17% (combined that's about 70%!) while Millennials have just about 5%. Older generations have been beneficiaries of time, compound interest and asset growth and investment in equity markets over extended periods of time.
3. Inheritance tax policies often make gifting while alive advantageous.
4. Some wealthier parents armed with cash are providing mortgages for their kids: 6% (a break on the higher mortgage rates, and better than you earn in a bank) on $500,000 is $2,500 per month in fixed income. Some expenses related to this MAY be tax deductible (an annual or bi-annual visit to inspect the home?).
5. Parents who buy a home jointly with their kids may allow BOTH to get a tax deduction on interest and real estate taxes (with limits). This could help offset some income taxes. Each case is different.
Source: Leonard Steinberg - Compass
PRACTICAL TIPS YOU CAN START PLANNING FOR
A $17,500 tax free gift can mean the difference between buyers accessing a home today or later in life. Statistically, homeowners have benefited the most with time of ownership. Every year that's delayed it's eroding the long-term gains. A plan to gift your kids to for early homeownership, can have more exponential benefits than other traditional help.
Smaller and earlier beats the race.
Financial education, and involving your kids in how the family finances work, can have a lifetime of benefits and create multigenerational wealth, in all levels of income.
Think of information over chores, get them involved in the things you do and watch out for in the regular maintenance of your home. Time over a last minute crash-course will always win.
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