Young homebuyers too reliant on the Bank of Mom and Dad for help

The Bank of Mom and Dad is a hugely influential force in the U.S. housing market. If it were a real financial institution, BoMaD would be the No. 7 lender, ranking among the top 10 U.S. mortgage lenders.

That's according to a recent report from economics consultancy Cebr, sponsored by Legal & General. The research shows what a vital role parents, grandparents and friends play in the U.S. housing market, supporting the purchase of $317 billion worth of property across America in 2018. That accounts for 1.2 million homes, with an average sum of $39,000 lent or given.

Why should this matter to mortgage lenders? Recently I called for the world's largest financial institutions, including the one I work for, to play a much bigger role in backing infrastructure projects in second- and third-tier cities that have great "bones" but crumbling substructure. My reasoning is that revitalizing these smaller, more affordable cities, and creating better affordable housing in them would act as an incentive for young people to live in them — whether staying in a smaller city after college or returning to the place in which they grew up.

The reality is that many young working people can't afford to buy their own homes. Major cities, which hold out all the promise of excitement, youthful appeal and jobs, unfortunately come with high rents and untouchable housing prices. These societal symptoms result in the need for Bank of Mom and Dad-type lending. But this could eventually be largely bypassed if the world's biggest financial firms invested in the creation of more affordable housing in more affordable places to live. This type of investment would require a longer view than companies currently seem willing to take. But the return would also be over the long-term, and would result in benefits to a broad range of people.

Parental generosity comes at a cost. This year's Bank of Mom and Dad research suggests that American families — not just the young — are feeling squeezed. Many generous parents go to significant lengths to help their kids buy their first home — some by taking out a loan (15%), some by raiding their 401(k) savings (8%), some by downsizing their own home (6%) and some even by coming out of retirement (3%).

While the current situation puts undue strain on many who have worked hard to secure a comfortable retirement, it also means that many in the younger generations are dependent on their parents and grandparents to buy a home — even after depending on them to get through college.

This is the first year that L&G has sponsored the Bank of Mom and Dad research in the U.S. having run the research in the U.K. for four consecutive years The fact that one in five U.S. housing transactions are dependent on the Bank of Mom and Dad paints a discouraging picture of the housing situation here. If financially strapped parents were to find it any more difficult to provide funds to help their loved ones with down payments, it's going to get even harder for would-be homeowners.

Home prices across the nation are already out of reach for many aspiring buyers. Millennials are beginning to despair of ever owning their own home. Of those Americans under 35 who don't already own a home, 43% say they don't expect this to change in the next five years — most often (40%) because it's simply not feasible to save for a down payment in that time frame.

We owe our generous parents a debt of thanks; the Bank of Mom and Dad continues to be a generous lender. But the Bank of Mom and Dad's major role in the U.S. housing market is not desirable, it is not sustainable, and it is not fair — either for the parents lending the money or young people who remain so dependent on it. Jobs, infrastructure and economic growth are needed to create thriving communities where people can afford to buy.

BoMaD reflects, first and foremost, a housing market where significant problems remain in matching the supply and demand of different types of housing, most notably starter homes and affordable housing of all kinds. As the population changes and the millennial generation strives to join the homeowning democracy, new thinking is due on meeting the housing needs and aspirations of Americans.