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BOMAD: Bank Of Mom and Dad

 

Parents - and other relatives - will always try to help their children, and many parents globally have helped theirs 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 buying a home.
 
 
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, the well of parent wealth is also being fueled by:
 
 
1.  Parents moving to lower taxed states/cities have more disposable money. Including money they can give to their kids as a gift.
 
2.  Older generations are significantly wealthier than younger generations. Babyboomers 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.

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