In today's climate, Empowering Next-Generation wealth in purchasing a house has become more of a collaborative effort within Ultra-high Net Worth (UHNW) families. Due to rising interest rates, high demand from young buyers, and a scarcity of available housing, parents have increasingly become involved in their children's home-buying process. If you wish to financially assist your children or grandchildren in buying their own home, what are your options?
To help you decide, we describe some of the key issues you might want to explore, as well as the four main tools parents commonly use to help children into new homes: outright gifts, loans, leases, and irrevocable trusts.
2024 Real Estate Market Conditions
Unsurprisingly, more clients have been asking us recently how best to help their children buy their first homes. Housing prices, mortgage rates, and competition for homes are all high.
Home prices rose an incredible 37.7% for the four years 2020 to 2023.
While prices may have come down a bit depending on the metro area, they have not dropped significantly in most areas of the country—nor do we expect them to for two reasons.
First, demand remains strong. Millennials (aged 27–44) now form the largest generation group in the United States (about 72 million strong), and make up the largest percentage of new home buyers (43%, according to the National Association of Realtors). They are projected to be the dominant force in the home market for years to come.
Second, supply remains limited. Since the 2008 bursting of the housing bubble, new home development in the United States has lagged demand. We estimate that today this gap totals approximately 2 million–2.5 million too few housing units.
Counterintuitively, the recent surge in mortgage rates is worsening the housing shortage. Homeowners who refinanced during the period of lower rates in 2020 (setting a record for the highest number of refinances) and in 2021 (the third highest, trailing only 2003) are now disincentivized to move and commit to a new mortgage with the current higher rates.
Meanwhile, our clients' children, accustomed to certain lifestyles and desiring quality school districts for their own children, often seek homes in more expensive areas.
Do you want to help and if so, how much?
Before you decide to assist your children in buying a home, it is essential to carefully evaluate the potential impact it may have on your personal wealth goals. You need to consider several factors, such as whether you want to help with the down payment or the purchase price, who will take care of the carrying costs and future improvements, and if you have the capacity and willingness to do the same for each of your children. You must also decide whether to treat them equally or
provide a bonus if they choose to live close to you. Additionally, you must determine if you want to structure it as a pool of funds to be used for any of a handful of reasons as they see fit. You can include your answers to these questions in your personal wealth plan to ensure it doesn't put any other goals in jeopardy.
Moreover, it is crucial to consider all potential family issues that could arise from your offer of help. You need to adopt a family policy about gifting and communicate that policy to them. Some options include saying, "This is your inheritance early," setting a certain dollar amount as a gift that will be extended to all children, no matter what they use the funds for, or adding a "bonus" if your children choose to locate within a certain distance of the family home. Whatever the policy, there remains the issue of how you would assist your child exactly.
Option 1: Gifts
Option 2: Loans
Option 3: Leases
Option 4: Trusts
Sourcing your capital
Every person and family has a unique situation. However, if your child is a Next Gen buyer, an adjustable-rate mortgage (ARM) might be a better option than a fixed-rate mortgage for a couple of reasons.
First, interest rates are likely to decrease in the next few years, so if they choose an ARM, they can pay a lower rate now than they would with a fixed-rate mortgage. Then, they can refinance to a lower rate later, possibly into a fixed product.
Secondly, most people in their twenties and thirties are not buying their permanent homes, and they are likely to sell in the next five to ten years. On average, people in this age group have a mortgage for seven years.
Summary
Navigating the current real estate landscape, marked by high prices, competitive markets, and limited supply, requires thoughtful consideration for parents looking to assist their children in purchasing homes. We outline four powerful tools commonly used for this purpose: outright gifts, loans, leases, and irrevocable trusts. The importance of evaluating personal wealth goals, considering family dynamics, and adopting a clear gifting policy cannot be overstated. Each option comes with its own set of implications, including tax considerations and potential impacts on personal wealth underscoring the need for a strategic approach, and aligning financial assistance with individual circumstances and preferences.