Let’s also note that mortgage guidelines allow for parents to contribute the entire 20% down payment. Hat tip to SM for sending in this article on the Bank of Mom & Dad!
Buying a home is increasingly a multigenerational family affair. Four in 10 parents recently surveyed said they expect to help their children buy a home. That’s more than double the percentage of parents who themselves got help from their parents when they bought their first home.
Home prices that have been rising faster than wages, combined with burdensome levels of student debt, are fueling this trend. Moreover, helping with home ownership is a here-and-now assist that can transform a child’s financial life, rather than waiting to bequeath money down the line.
Whether you are the Bank of Mom and Dad or the adult child eager to buy, a successful intra-family deal requires careful consideration of the various options:
Can you afford it? OK, parents, it is hereby stipulated that you, of course, want to help. Now the hard question: Can you cope with the long-term ramifications?
A $10,000 gift you make at age 65 would be worth more than $26,000 at age 85 if it kept growing at a 5% annualized rate. A $50,000 housing stake today would be worth more than $130,000 at age 85. If you have any inkling you could use that extra cushion in retirement, you probably shouldn’t be gifting money today. You could consider making it a loan – more on this below – but also keep in mind that if you intend to pull the money out of a traditional 401(k) or IRA, you not only will owe taxes, but a large withdrawal could bump you into a higher tax bracket for the year.
Got a boomeranger at home? Help them save for a down payment. According to the Pew Research Center, about 15% of today’s millennials are living at home, nearly double the rate when their parents were in their 20s and 30s. Making it a financial free ride does nothing to help your child build adulting muscles. If they’re focused on paying off student loans, great. But if they have ample cash flow and want to eventually buy a home, now’s the time they should start to save. You should insist that they set up a separate savings account and have automatic monthly deposits zapped into it from their checking account. A $500 monthly contribution is a down payment fund of more than $6,000 in just one year. That can be more than enough to qualify for a low down payment mortgage in many regions of the U.S.
When you drive around older neighborhoods, you see homes in original condition or in a state of disrepair, which are signs of senior homeowners. It makes you think, “They should sell and move – are they just waiting around to die?”
The answer is YES, and it’s because of how the IRS taxes the gain from the sale of your home. Once a property is inherited, the tax basis is stepped up to fair-market value.
The basis of property inherited from a decedent is generally one of the following.
The FMV of the property at the date of the individual’s death.
The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.
If a federal estate tax return doesn’t have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
For more information, see the Instructions for Form 706.
The above rule doesn’t apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.
For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.
For more information on community property, see Pub. 555, Community Property.
Baby boomers in full control of the market, and very few have a reason to sell. In fact, the list of reasons NOT to sell is so long that you can’t help but have a personal favorite that keeps you in limbo:
1. I don’t need the money.
2. The grandkids are here.
3. My low property taxes have me locked in.
4. My low mortgage-interest rate has me locked in.
5. Everything else is too expensive.
6. I don’t want to leave the city/state.
7. My parents might move in.
8. My kids might move in.
9. My kids need to inherit because they can’t afford a home.
10. I don’t want to pay capital-gains (on more than the $500K).
11. I got a reverse mortgage.
12. I love it here!
13. Waiting for the market to peak.
Yet we don’t have an inventory problem – heck, there are 1,005 houses for sale in North SD County’s coastal region (La Jolla to Carlsbad).
To buy one, you need to have some horsepower – the median list price is $2.25 million. But at least it looks like higher-end pricing has slowed:
First-half stats for homes priced over $2,000,000:
Jan-Jun # Listings
Jan-Jun # Sold
Has the higher-end market peaked? Compare this year to 2013.
It could be that egos are causing homes that are really worth $1.7-$1.9M to slip up into the $2M+ range, which would skew the median prices lower. But the sales have leveled off over the last three years, in spite of more choices. More listings but fewer sales keeps the pressure on pricing.
We were talking with some friends last night about how much financial support is going towards kids, and how it will affect real estate in the future.
On one hand, it’s the Bank of Mom and Dad, and helping to keep the market afloat when funding home purchases at these lofty prices for those kids with regular jobs.
However, for those kids who never get to the point of financial stabilization, the selling of the parents home will become the lottery ticket to solve their money issues.
I suggested that this is where the ibuyers could do the most harm by taking advantage of people who want and need a quick sale and who aren’t that familiar with the values.
When we were in Las Vegas for that one-day vacation, I saw more than one ibuyer ad on TV, and they were very enticing. The kids who have been strapped for years and then inherit their parents’ house might jump at the chance to get their hands on quick money – and likely leave some on the table.
Will anyone step up to protect the unsuspecting? A new challenge/opportunity for realtors!
“Since last year, several forces have helped increase the market potential for existing-home sales,” said Fleming. “House-buying power, driven by falling mortgage rates and rising household income, contributed to a gain of 183,000 potential home sales compared with one year ago. Compared with May 2018, rising house prices also contributed positively, increasing the market potential for home sales by 41,000.
“Additionally, loosening credit standards boosted the marketing potential for home sales by more than 60,000 sales over the last year. Some modest growth in new-home construction also added 1,000 potential home sales,” said Fleming. “Finally, the growth in household formation, as millennials continue to form households, contributed nearly 81,000 potential home sales compared with a year ago. Despite all the positives, the market potential for home sales remains nearly 80,000 units below the level of a year ago.”
Unprecedented Homebody Era is Here
“Collectively, the aforementioned market forces contributed to a positive gain of 366,000 potential home sales, but it was not enough to offset the loss of 446,000 potential sales due to the impact of rising tenure. The average tenure length, the amount of time a typical homeowner lives in their home, has increased dramatically in the last year,” said Fleming. “Since existing homeowners supply the majority of the homes for sale and increasing tenure length indicates homeowners are not selling, the housing market faces an ongoing supply shortage – you can’t buy what’s not for sale.
“Before the housing market crash in 2007, the average length of time someone lived in their home was approximately five years. Average tenure length jumped to seven years during the aftermath of the housing market crisis between 2008 and 2016,” said Fleming. “The most recent data shows that the average length of time someone lives in their home reached 11.3 years in May 2019, a 10 percent increase compared with a year ago.
“Two trends are driving the increase in tenure length. The majority of existing homeowners have mortgages with historically low rates, so there is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank,” said Fleming. “While mortgage rates have come down compared with last year, they are still below the 3.5 percent mortgage rates of 2016.
“The second trend influencing tenure is seniors aging in place. A recent study from Freddie Mac shows that if seniors and adults born between 1931-1959 behaved like earlier generations, nearly 1.6 million housing units would have come to market by 2018,” said Fleming. “Improvements in health care and technology have made aging in place easier, which has meant fewer homes on the market.
“So far in 2019, the market potential for existing-home sales has benefited from lower mortgage rates and rising household income, all contributing to stronger house-buying power,” said Fleming. “Surging consumer house-buying power coupled with rising household formation has resulted in strong demand for homes.
“Yet, today, we are in an unprecedented homebody era as many existing homeowners continue to feel rate-locked into their homes and seniors continue to age in place. Looking ahead, more than half of all existing-homes are owned by baby boomers and the silent generation and they will eventually age out of homeownership,” said Fleming. “But right now, housing supply remains tight – you can’t buy what’s not sale — and market potential is lower because of it.”
Twenty percent of Americans is a good-sized group, and with the cost and difficulty of senior care being so high, it is natural for more people to consider multi-generational living. Home sellers who can present their home as multi-gen friendly could really benefit.
PNC is one of several banks and lenders paying more attention to “the sandwich generation,” people with dependent children and with elderly parents for whom they need to care. While not everyone in the sandwich generation has parents living with them, it is a growing phenomenon: Today, 20% of Americans live in multigenerational homes, where at least two adult generations live under one roof, accounting for 64 million people. In 1980, only 12% of Americans lived this way, according to the Pew Research Center.
“This has been on our radar for the last couple of years,” said Todd Johnson, Wells Fargo Home Lending’s Division Sales Manager, Pricing and Products Lead. In January, Wells Fargo lowered the down payment requirement for duplex buyers to 5% from 15% to 20%. This program is only available for loans that conform to Fannie Mae and Freddie Mac guidelines, but Mr. Johnson noted that loan limits for duplexes in costly areas can be relatively high.
For example, in San Diego a conforming duplex loan can reach $883,300, and in San Francisco, $930,300, Mr. Johnson said. Such loans can have as many as four borrowers, so a couple plus a set of elderly parents can all take out the loan together, Mr. Johnson said.
The program, however, comes with homework: It requires borrowers to take a four- to six-hour online course about being a landlord. What if your own mom and dad are going to be your tenants? You’ve still got to take the class, Mr. Johnson said. It covers issues such as getting insurance and landlord deductions and depreciation.
A common approach is for the older couple to sell their own home and use the equity to help make the down payment on the multigenerational home.
If a loan doesn’t allow gift funds to be used as a down payment, Ms. Graziano said, “the older couple may need to become a co-borrower on the mortgage loan as well as an owner named on the title to the property.”
When those older parent co-owners pass away, it can get complicated, especially if the parents have other heirs, says Ms. Graziano. “It may require refinancing the property to cash out the [parents’] equity, or selling the property.” For loans that PNC Bank treated as a single-family home at origination, the borrowers can rent out their extra unit to someone else without penalty if renting parents die or move, Mr. Boomer said.
Home prices have been on a tear for ten years straight, and are at their highest levels ever.
Is this bubble going to pop too?
Let’s look at the statistics first. I took the most recent 45 days to get the latest scoop, plus the MLS prefers to calculate the smaller sample sizes.
NSDCC Detached-Home Listings and Sales, April 1 – May 15 (La Jolla to Carlsbad)
# of Listings
# of Sales
It is remarkable that all-time-high prices aren’t causing more people to sell!
In previous markets, once prices started reaching new highs, homeowners would jump at the chance to move. The inventory would grow and cool things off, and/or we’d hit an economic downturn and foreclosure sales would direct the market. But not today!
We are a mid-level luxury market. The more-expensive areas like Los Angeles, Orange County, and the Bay Area feed us downsizers who think we are giving it away.
Homebuying has de-coupled from jobs. We do have substantial employers like Qualcomm, bio-tech, etc. but not near enough to justify these lofty prices. How do we keep afloat? It’s the big down payments; either from previous home sales, successful business ventures, or the Bank of Mom & Dad.
They changed the rules. Banks have to give defaulters a chance to qualify for a loan modification before they can foreclose. With everyone enjoying their equity position, they will find a way to hang onto their house or sell it for a profit, instead of lose it.
Reverse mortgages are an alternative for those who need money. They might crank down the amount of money you can tap, but as long as homeowners are flush with equity, they will be able to get their hands on some of it via reverse mortgages or the typical equity line.
Buyers have been full of money, and willing to blow it. I’ve seen sales close for 10% to 25% above the comps this year, so it doesn’t seem like people are worried about a bubble. Those sales could be creating unsustainable comps, and be short-lived values, but will the next buyer question them enough?
Coming Soon vs. ibuyer. We need a gimmick to transition us to the ibuyer era, and the ‘Coming Soon’ off-market sales will be the sexy distraction. The price of an off-market sale isn’t necessarily lower than retail, and in some cases they can be higher when the buyers get jacked up about the opportunity.
The ibuyer era could be the last hurrah for open-market real estate. If the big-money corporate buyers can build enough credibility and begin to dominate the space, they will be able to dictate the prices paid for their flips, and control the marketplace. If so, they will make sure we won’t have another down market!
In the meantime, we might see prices start to bounce around, instead of the constant trend higher. But if it gets harder to sell, then many will just sit tight instead.
If you think a bubble pop will happen, ponder this question. Who is going to give away their home now?
Hat tip to CB Mark for sending in another article on people leaving California – I added the U.S. Census stats for San Diego County at the bottom:
People have long dreamed of moving to California, but increasingly the people in the state are looking to get out.
According to recently released data from the US Census, about 38,000 more people left California than entered it in 2018. This is the second straight year that migration to the state was negative, and it’s a trend that is speeding up. Every year since 2014, net migration has fallen.
California’s population did still increase in 2018 by almost 160,000 people, largely due to the 480,000 people born in the state. But while migration out of the state has accelerated over the past few years, the number of annual births has been steady. The trend suggests in the next decade California’s population will begin to decline.
Besides births, the main reason California’s population hasn’t already started falling has been international migration into the state. Every year since 2011, net domestic migration has been negative—i.e., more people leave California than move in from other states. But from 2011 to 2016, the number of international migrants moving into California was larger than the number of locals who were moving out.
Since then, however, domestic departures have outstripped international arrivals. In 2018, 156,000 locals left the state, compared to 118,000 international who came.
The exodus from San Diego County is picking up steam. Where the cumulative total of domestic migration over the last eight years was only 46,596 (avg. 5,825 per year), we had 10,835 leave in the most recent 12 month segment – and the international arrivals have slowed considerably too:
As boomers grow older, it’s inevitable that their housing transitions will affect the real estate market. But it seems spread out enough that the impact will be digested….at least at some price. There will probably be times when a few old homesteads in the same area are sold at the same time, but it should all even out in the long run.
The Baby Boom generation (1946-1964) has an enormous housing market footprint, inhabiting 32 million owner-occupied homes and accounting for two out of five homeowners in the United States with an estimated value of $13.5 trillion. And when they decide to divest, said Fannie Mae, Washington, D.C., the impact could spur fears of a “bursting generational housing bubble.”
In a report, The Coming Exodus of Older Homeowners, the Fannie Mae Economic and Strategic Research Group said departures of these older adults from the homeownership market–for rentals, senior care facilities or by reason of death–will accelerate as the large Baby Boom generation continues to age.
“With the oldest Boomers now advancing into their 70s, the beginning of a mass exodus looms on the horizon, spurring fears of a bursting ‘generational housing bubble’ in which homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners,” wrote authors Dowell Myers, professor at the University of Southern California; and Patrick Simmons, Fannie Mae Director of Strategic Planning. Further, the authors warned a “fumbled” intergenerational handoff “would reverberate through the housing market and economy.”
For the first time in recent history – and probably the first time ever – the net migration out of California has not been offset by the international inflow.
The number of people leaving the state is 3x what it was just 4+ years ago!
But the state population is still growing….naturally. Over the last eight years, there have been almost 2 million more births than deaths!
With baby boomers living longer, the birth/death balance should level out eventually, but all those young people need to live somewhere – and only the affluent will be able to purchase a home. (click to enlarge)
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