WASHINGTON–While homeownership among young adults has fallen sharply since the onset of the housing bust—leading to the perception that family help is needed—new research has found that only about one in 17 adult children who are between the ages of 20 and 49 and are not already homeowners receive substantial parental financial assistance.
Fannie Mae reported that the homeownership rate of households headed by 25- to 34-year-olds was 36.9% in 2014, nearly 10 percentage points lower than in 2006—the high-water mark for the nation’s homeownership rate.
“One obstacle to a rebound in young-adult homeownership is the substantial up-front cost of purchasing a home,” said Fannie Mae. “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.”
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 analyzed 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 shows that only about one 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. 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 2004, show that the unconditional likelihood of transitioning into homeownership during a two-year period is increased by 23% 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% with receipt of a transfer.
By contrast, the research found 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.