Mom, Dad, Can I Borrow My Inheritance?

From SFGATE

"The market may be softening like an overripe peach, but in the wake of rising interest rates and exorbitant prices, the fact that there are still new buyers out there at all is nothing short of astounding."

"The affordability index is still at an all-time low: According to the California Association of Realtors, only 14 percent of families in California can afford a median-priced home."

"Even in my own narrow circle of struggling young families, I've known a half dozen to finally bite the bullet in the past six months and buy their first Bay Area home. These are not doctors, lawyers and chief technology officers but ordinary folk whose incomes as filmmakers, carpenters and herbal therapists don't cover much more than day care and burritos."

"So if people are still buying, where is the money coming from?"

"There are two primary answers to this question. Both say something about how much we as a nation are banking our future on the promise of financial security in homeownership. Both say something about the risks many of us are taking to become part of that "ownership society."'

"The first answer is good ol' Ma and Pa, or as one Money Magazine article put it, "The National Bank of Mom and Dad." According to the National Association of Realtors, last year 37 percent of first-time homebuyers reported that they had paid for their down payments in part or in whole with a gift, loan or inheritance from a family member or friend."

(In 1991 only 18 percent of first-time buyers reportedly received monetary gifts from family or friends for down payments.)

"Indeed, the 37 percent of first-time homebuyers who admitted to getting some form of financial help from family or friends probably underestimates the reality. Since lenders scrutinize an applicant's finances more closely if down payments come from a family member or friend, it's likely that many homebuyers prefer to claim that they have funded their down payments exclusively through savings."

"Such figures would also omit the plethora of equity-sharing situations that have become common for first-time buyers in the Bay Area. Some parents I know have bought duplexes with their children, cosigned a loan or bought a percentage of a single-family house with the expectation that the real estate would function as an investment for them or as a retirement home in the future.

Even the massive boom in "second homes" may be explained in part by the growing practice of parents buying homes for their children outright."

"The increasing involvement in helping children become homeowners may help explain a report published by AARP last month that dispelled the long-touted theory that Baby Boomers are poised to receive the greatest transfer of wealth in history -- an estimated $41 trillion."

"The June report ("In Their Dreams: What Will Boomers Inherit?") looked at the Federal Reserve Board's Survey of Consumer Finances and found that only about 20 percent of all households in 2004 reported that they had received at least one inheritance."

"The study showed that far fewer inheritance dollars were passing into the Boomer pocketbook than predicted."

"But the report didn't account for the possibility that some of this expected "inheritance" was disappearing into the housing market in many ways. Although the AARP data included "gifts" as part of the concept of inheritance, it did not specify what a gift was."

"So there's no way to know if respondents included things like down payment assistance in this category. In all likelihood some of them did, but it's also likely that many didn't deem below-market loans and equity-sharing arrangements as such."

"Families with substantial accrued equity are increasingly supporting their children's homeownership dreams, making sure they very literally inherit a little bit of the earth. But what about all the others who are buying homes in this steep market but with no Daddy Dole or Joy Luck Mama?"

"This brings us to the second answer about where the money is coming from."

"Nowhere."

"According to the National Association of Realtors, last year nearly 43 percent of first-time homebuyers took out zero-down-payment loans."

"In the West, that number topped 50 percent."

"In a climate of rising interest rates and tightening lending standards, this can't go on. After all, these loans already have very high interest rates, and now that banks are inspecting the finances of first-time buyers more closely, fewer of them are going to be getting such loans."

"In the long term, even with softening prices, many potential buyers without parental units to lean on will in the end choose not to buy at all.

This may restore some sanity to the marketplace -- or it may exacerbate the stratification within our society between the landed middle class and the tenant middle class."