Young homebuyers too reliant on the Bank of Mom and Dad for help
7 May 2019
Speaking in National Mortgage News, CEO Nigel Wilson discusses how big an impact 'The Bank of Mom and Dad' has on the U.S. housing market.
The Bank of Mom and Dad is a hugely influential force in the U.S. housing market. If it were a real financial institution, BoMaD would be the No. 7 lender, ranking among the top 10 U.S. mortgage lenders.
That's according to a recent report from economics consultancy Cebr, sponsored by Legal & General. The research shows what a vital role parents, grandparents and friends play in the U.S. housing market, supporting the purchase of $317 billion worth of property across America in 2018. That accounts for 1.2 million homes, with an average sum of $39,000 lent or given.
Why should this matter to mortgage lenders? Recently I called for the world's largest financial institutions, including the one I work for, to play a much bigger role in backing infrastructure projects in second- and third-tier cities that have great "bones" but crumbling substructure. My reasoning is that revitalizing these smaller, more affordable cities, and creating better affordable housing in them would act as an incentive for young people to live in them — whether staying in a smaller city after college or returning to the place in which they grew up.
The reality is that many young working people can't afford to buy their own homes. Major cities, which hold out all the promise of excitement, youthful appeal and jobs, unfortunately come with high rents and untouchable housing prices. These societal symptoms result in the need for Bank of Mom and Dad-type lending. But this could eventually be largely bypassed if the world's biggest financial firms invested in the creation of more affordable housing in more affordable places to live. This type of investment would require a longer view than companies currently seem willing to take. But the return would also be over the long-term, and would result in benefits to a broad range of people.
While the current situation puts undue strain on many who have worked hard to secure a comfortable retirement, it also means that many in the younger generations are dependent on their parents and grandparents to buy a home — even after depending on them to get through college.
We owe our generous parents a debt of thanks; the Bank of Mom and Dad continues to be a generous lender. But the Bank of Mom and Dad's major role in the U.S. housing market is not desirable, it is not sustainable, and it is not fair — either for the parents lending the money or young people who remain so dependent on it. Jobs, infrastructure and economic growth are needed to create thriving communities where people can afford to buy.
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Parental generosity comes at a cost. This year's Bank of Mom and Dad research suggests that American families — not just the young — are feeling squeezed. Many generous parents go to significant lengths to help their kids buy their first home — some by taking out a loan (15%), some by raiding their 401(k) savings (8%), some by downsizing their own home (6%) and some even by coming out of retirement (3%).