Updated: Aug 26, 2019
According to the Washington Post, rising home prices are sending first-time home buyers to their parents to help with mortgage down payments.
The Federal Housing Administration’s (FHA) annual report, released at the end of 2018, showed that 26% of mortgage borrowers who used FHA-insured loans received assistance from a relative to make the down payment in the 12 months through September (which is an increase from 22% in 2011).
What is the FHA?
The Federal Housing Administration was created in 1934, in the midst of the Great Depression.
They provide insurance on loans made by FHA-approved lenders throughout the United States and its territories.
Since its inception, the FHA has helped finance military housing and homes for returning veterans and their families after the war. This sparked the production of millions of units of privately-owned apartments for elderly, handicapped, and lower income Americans, and steadied falling home prices in the 1980s by making it possible for home-buyers to get the financing they needed when the recession prompted private mortgage insurers to pull out of oil producing states. (hud.gov)
For more information about FHA Loans, check out this article.
Looking at today, although the growth of home-prices has slowed, prices are still rising each year, and high mortgage rates have made buying a home considerably more expensive. Additional factors affecting first-time home buyers include student debt and “lackluster wage growth,” (The Washington Post) both of which have made it very difficult to keep up with rising home prices. Currently, the home-ownership rate for those 35 and younger has fallen 8 points since 2004 to 35% in 2017, according to Freddie Mac.
How does all this affect Boston’s real estate market?
Boston holds the distinct honor of being ranked among the most expensive cities in America, and has seen considerable price appreciation over the past 8 years. This has created an environment where purchasing homes is an expensive proposition. Add in a healthy dose of competition, where anything less than 20% down is unlikely to win in a multiple bid situation - as we see many of the lower priced/entry level homes go through.
Boston does have high salaries compared to much of the nation. It’s not uncommon to see an individual in their mid-twenties earning $80,000 or more. While this provides bandwidth to afford $2-3k/month in rental payments, a down-payment of $100,000 or more is likely not feasible, especially if you're fairly new to the workforce. Enter parents. We see many individuals purchasing homes with a down-payment of 20%, which has become increasingly more common these days.
There are three factors that may affect this "new normal," the first is to remain competitive as a buyer, the second is for ancillary investment and the third is to keep payments reasonable. This is especially true if the home-buyer is handling the monthly payments on their own.
According to the Washington Post, there has been a decline in the credit quality of individuals who take out loans with the FHA. The FHA report showed the average monthly debt of borrowers to be equal to 43% of income in 2018, which makes it the “sixth straight annual rise in that measure of creditworthiness.” (The Washington Post) Additionally, the credit score of the average borrower declined to 670, the lowest level since 2008 (remember what happened in 2008?).
The FHA reports that almost 39% of all FHA borrowers get down-payment assistance (an increase from less than 30% in 2011), whether that be from relatives, the government, or another entity.
We’re anticipating that the rate of purchases with ‘assisted down payments’ will continue to be a prevailing trend in 2019 for Boston’s real estate market. An ancillary aspect of this, is the parents/family’s interest in investing in the Boston market. Providing a down-payment for a child, provides them with exposure to the Boston real estate market, without having to purchase an entire home and become a landlord. Boston has, and remains, a strong market to invest in. We anticipate this trend to continue. The child earns valuable experience ‘owning’ a home and the parent diversify their investments through real estate.