Most first-time homebuyers rely on family, friends to make a down payment
It’s no longer a secret: the reason the housing market is booming is because of Millennials buying homes en masse.
They are doing it strategically because interest rates are friendly. Many of these purchases are being made by first-time homebuyers who maybe were originally thinking of buying their first home in a year or two, but who could pass up the opportunity of such affordable interest rates?
That said, a lot of the money being used to make a down payment on these homes are coming from older generations – namely parents or extended family.
According to a survey conducted by HarrisX for Realtor.com, 52% of Americans who bought their first home in 2020 said that family or friends helped them make their down payment.
This is a figure that doubled the total from last July (26%), where, in a separate survey conducted by the National Association of REALTORS® (NAR), that percentage was based on home purchases by first-time homebuyers in a 12-month span from mid-2019 through mid-2020.
While its easy to suggest that comparing two different surveys conducted by different companies at different time periods is like comparing apples to oranges, the polling was similar enough in design and the question was similar enough in form that to get that big of a jump is definitely noticeable and even eye-opening.
The results are most likely the result of the COVID-19 pandemic, which has deeply impacted real estate on many levels, including the buying and selling of property.
Home prices are skyrocketing – in many cases because offers are coming in above the list price. But prices are higher and pocketbooks are being squeezed because of strains directly related to the pandemic. First-time homebuyers find themselves at a time where it’s smart to buy a home – because of the historically low interest rates on mortgage lending – but also where they may not have the bankroll necessary to make the purchase, leaving them in a spot where they are looking to borrow money from family and friends.
According to NAR data, the median home price in the U.S. climbed to $309,800 in December, a 12.0% increase from December 2019. That median is the direct result of something taught in economics 101: prices increase when demand is greater than supply.
In December, NAR identified a record-low, 1.9-month supply of homes on the market. That figure is based on the time it would take to run out of homes for sale if no new homes or multifamily complexes were being built or developed. In December 2019, the supply of homes on the market was equal to 3 months.
With the average 30-year fixed rate mortgage at 2.7% at the end of January, buyers are seeing the benefit of borrowing from loved ones to make a down payment, as a larger sum to be put down will create lower monthly mortgage costs in the long run.
According to the Realtor.com survey, 44% of first-time home buyers said they borrowed money from family while an additional 8% said they borrowed from friends.
This type of borrowing was likely necessary because 49% of the first-time homebuyers found a home they loved, but ended up being outbid on the home, according to the Realtor.com survey.
As long as the pandemic continues to impact the economy, and home sales boom while interest rates remain so small you need a microscope to see them, you can bet that first-time homebuyers – specifically those on the younger end – are going to be hitting up the bank of mom and dad, or grandpa and grandma, or even uncle Charlie and Aunt Marge, to help make a down payment that will get them into their first home.
Information from USA Today was used in this report.