The "Bank of Mom and Dad" and Young-Adult Transitions into Homeownership
Homeownership among young adults has fallen sharply since the onset of the housing bust. The homeownership rate of households headed by 25- to 34-year-olds was 36.9 percent in 2014, nearly 10 percentage points lower than in 2006 – the high-water mark for the nation’s homeownership rate.1
One obstacle to a rebound in young-adult homeownership is the substantial up-front cost of purchasing a home. According to Fannie Mae’s National Housing Survey®, half of young renters cite affording the down payment or closing costs as the biggest obstacle to obtaining a home purchase loan.2
Parental financial assistance enables some young adults to surmount the up-front costs of buying a home. To better understand the role of parental assistance in the home buying process, Professors Dowell Myers, Gary Painter, and Julie Zissimopoulos of the University of Southern California are analyzing two data sets – the Panel Study of Income Dynamics (PSID) and the Health and Retirement Survey (HRS) – that provide information on parental financial transfers, adult children’s transitions into homeownership, and a variety of child and parent demographic, social, and financial characteristics. A new working paper from their research explores the prevalence of parental financial assistance and the extent to which it makes a difference in young adults’ transitions into homeownership. The working paper extends the existing literature by estimating the effect of financial transfers on homeownership transitions independent of child and parental characteristics and by examining how the impacts of parental financial transfers vary with children’s age and race/ethnicity. The working paper is the first installment in a series of studies that will examine the roles of parental resources, educational attainment of parents and children, and other factors in the homeownership attainment of young adults.
The working paper shows that only about 1 in 17 adult children who are between the ages of 20 and 49 and are not already homeowners receive substantial parental financial assistance, defined as cumulative transfers for any purpose of at least $5,000 within the preceding two-year period in the HRS and transfers totaling at least $2,500 over a one-year period in the PSID.3 The likelihood of receiving parental assistance varies substantially with the age, race, and ethnicity of the child and with 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 parental assistance is received, as might be expected, the impact on homeownership transitions is notable. The results from the HRS, which are based on data from 1998 to 20044, show that the unconditional likelihood of transitioning into homeownership during a two-year period is increased by 23 percent among adult children who have received substantial financial assistance from their parents during the period. Even after controlling for parental wealth and a variety of other parent and child characteristics, the probability of transitioning into homeownership still grows by 13 percent with receipt of a transfer.
By contrast, transfers had no statistically significant association with home buying in the PSID data, whether or not any child or parental characteristic controls were introduced. This result might reflect PSID’s small sample size or the unique aspects of its 2012-2013 reporting period, when house prices had begun to recover, but lagging employment and incomes, and difficulties in mortgage qualification, depressed the numbers of young adults transitioning into homeownership.
As previously noted, one unique aspect of the research is that it examines how the effects of parental assistance on transitions into homeownership vary with the age and race/ethnicity of the child. The HRS analysis finds that children aged 20-24 who receive a sizeable transfer from parents are no more likely to become a homeowner than those who do not receive a transfer, which might indicate that transfers at that age are targeted for education expenses. In addition, non-Hispanic white children who receive parental transfers are more likely to become homeowners than those who do not receive transfers, but this result is not observed for black children.
In addition to showing that the provision of financial assistance, which is a potentially alterable parental behavior, plays a significant role in children’s transition into homeownership, the study has other implications. For example, the findings that children from families with higher-wealth parents are much more likely to receive assistance, or that young minorities are substantially less likely to receive parental financial assistance than their white counterparts, suggest that the aggregate role of parental assistance in supporting homeownership could potentially weaken as the nation’s young-adult population continues to diversify. 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.
Professor of Policy, Planning, and Demography
University of Southern California
Director, Strategic Planning
Economic & Strategic Research Group
April 26, 2016
1 U.S. Census Bureau, American Community Survey, 1-Year Estimates, Table B25007: Tenure by Age of Householder.
2 Fannie Mae. May 2014. What Young Renters Want and the Financial Constraints They See. Slide 14. http://www.fanniemae.com/resources/file/research/housingsurvey/pdf/nhsmay2014presentation.pdf.
3 The HRS and PSID measure parental financial transfers over different intervals, and hence the different transfer periods and thresholds used in these prevalence estimates.
4 A planned extension of the analysis is awaiting release of data covering the period for 2008 to 2012.
The authors would like to thank Gary Painter, Julie Zissimopoulos, and the other members of the project research team for their work on this study. The authors also thank Mark Palim and Hamilton Fout for their comments on the Working Paper upon which this FM Commentary is based. Of course, all errors and omissions remain the responsibility of the authors.
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