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Parental financial assistance enables downpayment management

May 2nd, 2016 | First-Time Homebuyers!

parents helping children

Does The Bank of Mom and Dad Help Homeownership?

 

Apr 29 2016, 9:50AM
by: Jann Swanson 

Does a financial boost from mom and dad make it more likely a young person will buy a home? 
It depends.  And that might change.

Homeownership rates across all demographic groups have fallen since the beginning of the Great Recession but the rate among 25 to 34 year olds has been especially hard hit, dropping 10 points from the nation's peak in 2006 to 37 percent in 2014.  Fannie Mae's National Housing Survey has found the upfront expenses of buying a home to be the largest barrier to homeownership among that young age group.

Parental financial assistance enables some young adults to manage the downpayment and closing costs and the USC researchers explored the prevalence of such assistance and the degree to which is helps the recipients transition into homeownership.  The working paper estimates the effect of financial transfers on homeownership transitions independent of child and parental characteristics and examines how the impacts of parental financial transfers vary with children's age and race/ethnicity.

First, the research found that, among adult children ages 20 to 49 who are not homeowners only about one in 17 receive substantial financial help from their parents.  The HRS study defines this as cumulative transfers for any purpose of at least $5,000 within the preceding two years and the PSID as $2,500 over a one-year period.

There was substantial variation in the likelihood of receiving parental help according to the age, race, and ethnicity of the child and the wealth of the parent. "For example, children of parents in the highest quartile of the wealth distribution are about eight times more likely to receive substantial transfers than are those with parents in the lowest quartile, and non-Hispanic white children are several times more likely to receive a transfer than their Hispanic and black counterparts."

When a child does receive assistance the impact on homeownership is notable.  The HRS data (collected between 1998 and 2004) shows that children who receive assistances have a 23 percent greater chance of achieving homeownership within the two-year period than those who do not.  After controlling for parental wealth and a variety of other parent and child characteristics, the increase in the probability buying is still 13 percent.  

The second study, with a smaller sample and data collected in 2012-2013 showed no significant association between financial transfers and the likelihood of homeownership.  This may be because the study period was one in which home prices were recovering but employment, income, and credit access were lagging.

Age and ethnicity also enter the equation and the HRS analysis showed that children receiving a transfer from parents while aged 20-24 show no increase in homeownership, possibly indicating that such transfers were targeted at educational expenses.  Non-Hispanic white children who receive a transfer demonstrate an increase in homeownership but this result is not observed for black children.

The parental provision of financial assistance, potentially an alterable behavior, appears to play a significant role in children's transition into homeownership.  But the findings that children from families with higher-wealth parents are much more likely and that young minorities are substantially less likely to receive parental financial help suggests that this assistance could potentially weaken in the aggregate as the nation's young-adult population continues to diversify.

The authors conclude, "As the housing industry looks to the large and racially and ethnically diverse Millennial generation as a new source of home purchase demand, the potential and limitations of the 'Bank of Mom and Dad' need to be kept in mind."

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