By Anna.Ruotolo@nafinc.com
January 20, 2015
Prospective homebuyers having trouble securing mortgage credit through traditional channels might find it comforting to know they're not alone - and that they have other options. Government-program loans, such as those offered by the Federal Housing Administration or the U.S. Department of Veterans Affairs, offer low down-payment terms for those who are eligible. It's also important to recognize that, even for those who don't qualify, a down payment doesn't have to come entirely from personal income. Many first-timers are finding that generous gifts from friends, family members or other third parties are offering the boost they need to secure the purchase of a new home. A recent Bloomberg report chronicled the growing trend of "Mom-and-Dad banks," which are playing an increasingly important role as lenders and currently helping sustain the housing recovery. Based on data compiled by the National Association of Realtors, 27 percent of first-time homebuyers in 2013 received a cash gift to help with the down payment, usually from relatives or friends. That's the most substantial rate seen since the NAR began collecting that sort of data in 2009, and it's up from 24 percent in 2012. Many economists expect those numbers to remain steady - possibly even balloon further - as many would-be first-time buyers continue to deal with burdens related to heavy student debt and stagnant wage growth. Until mortgage lending standards are relaxed somewhat, alternative products and less traditional methods for financing will continue to be explored. And as property values continue to appreciate in many parts of the country, a lot of younger adults are finding their homeowning parents are suddenly equipped with ample equity. That newfound wealth can result in assistance, especially now, while borrowing costs remain near historically low levels. "Without them, the recovery's not sustainable," Anika Khan, a senior economist for Wells Fargo Securities LLC in Charlotte, North Carolina, told Bloomberg. "[The trend] just moves the housing recovery along." Factors working against the traditional buyer This past July, the Federal Reserve released its annual report on the collective wealth of American households, finding the struggle to save toward a down payment was the most common reason many would-be buyers opted to rent instead. Even those who did buy homes in 2013 admitted they might have done it sooner had they not be hampered by various debts. In fact, 54 percent of first-time buyers acknowledged that their student loan obligations deterred or prevented them from fulfilling their homeowning dreams earlier. That gives further credence to what the NAR and other industry groups have been contending for some time now: Student debt is the primary contributor to the lack of activity from first-time buyers, who comprised just 29 percent of the overall homebuying population in 2013, compared with about 40 percent historically. Over the past two years, the influx of investors who have infiltrated the market hasn't helped the cause of younger buyers. It's nearly impossible for them to compete with such cash-in-hand buyers, who emerged with regularity in distressed markets, often looking to buy foreclosures or short sales with the endgame of rehabilitating - and reselling at a profit - in mind. But as Lawrence Yun, chief economist for the NAR has noted, with home retention rates improved and fewer foreclosures lining most local housing markets, that investor influence has eased. And that means competition is less fierce in many areas. "With the investors stepping away, for some first-time buyers and millennial buyers, they have less competition," Yun said. "So it would be an opportune time to enter the market." Of course, it's not realistic for all homebuyers to be in a position to receive such financial support. But the prospects of lighter competition and improving inventory levels - perhaps buoyed by eventually eased approval standards - should be encouraging for aspiring first-timers nonetheless.