Tapping Into Home Equity
An October Wall Street Journal article tapped into one solution millennials are finding to buy homes now: asking parents to take out a HELOC to fund the full cost of their offspring’s desired home.
In cities where competition is fierce — big cities such as Washington, DC, Boston, and Seattle — even borrowers with high-paying jobs or large down payments are losing out to those who can pay in cash.
The article mentions a 20-something Olympic athlete whose parents took out a HELOC so he could pay $2.8 million in cash for his first home, a newly built property in Los Angeles. According to the Journal, his offer beat out four others.
This strategy has obvious benefits, of course. Cash offers allow transactions to close quickly because the deals aren’t contingent on financing. In addition, in bidding wars, cash is more flexible than financing — especially if the purchase price is higher than the list price.
For this to work, however, parents must have enough equity in their homes to make the refinance worth it, and hard conversations will need to take place: “Dear Mom and Dad, so there’s this great house. How much is it? Well…here’s the thing…”
Repaying Over Time
In the above scenario, while one’s parents may buy the house, it’s most certainly not a gift.
It’s become more common for parents to act as their child’s personal mortgage lender, in fact, though there are federal guidelines regarding interest rates on these loans. Still, these rates are likely lower than the child might find on the open market.
One such repayment option is a rent-to-own agreement that transfers equity between parent and child. In a rent-to-own agreement, the borrower typically rents a property for a set amount of time (usually one to three years) after which he or she can purchase the house from the seller. It’s not as simple as it sounds, as certain terms and conditions must be met, but a rent-to-own agreement between parent and child can get him or her into a home with manageable monthly payments.
This kind of creative homebuying strategy isn’t for everybody — in fact, it’s hardly for anybody — and it’s certainly not for me. Sad to say, my parents don’t have millions in home equity lying around at my beck and call, and even if they did I wouldn’t ask.
If I’m to buy a house, I’d have to do it the old-fashioned way — save and save and save. But here’s the thing: will I ever afford one?
Will I Ever Buy A House?
In thinking about buying a home there are a slew of variables I must consider: my wants, needs, short-, and long-term financial picture.
I’ve lived in the Washington, DC, area my whole life. It’s a place I’ve grown to love and the place I could see myself settling down long-term. It’s also prohibitively expensive. The average DC home list price is $773,286, per Trulia, with a median sales price of $625,000. Those figures rank second and first on the list of most expensive home price by state.
I own a car I rarely use and doesn’t do speeds more than 60 mph. If I wanted to move further out from the city, I’d have to find a new way to work (or buy a new car) to which I’m not opposed. That’s just an added cost. Otherwise, to find a house that fits what I need in an area that’s not more than an hour from the city, I’d comfortably expect to find a listing price between $500,000 and $750,000.
Unfortunately for me, this is now a seller’s market. In September, Redfin reported the number of homes for sale nationally “plunged” 10.9% year-over-year, continuing the 24-month streak of declining inventory. New listings in September fell 7.7% year-over-year, leaving 3.3 months of supply. Less than six months of supply signals the market is tilted in favor of sellers. In addition, price-growth was strong, up 7.6% in September.
But say I do find a house I want on the lower end of that price spectrum. What then?
I’ve done a good job in my life building my credit score, and I’ve been fortunate to pay off my student loan debt before I’m 27. Still, I’m in no position to make an all cash-offer on anything and I don’t have enough saved to make the competitive (and needed) 20% down payment offer on a $500,000 house.
And while I wish I could find a starter home in a desirable neighborhood, take out an adjustable rate mortgage, and build equity and savings until it’s time to jump to a home in that higher price range, entry-level homes don’t exist as they once did. According to Harvard University’s Joint Center for Housing Studies, between 2004 and 2015, completions of homes under 1,800 square feet fell from 500,000 units to 136,000. Also, according to the report the number of townhouses started in 2016 was less than half the number started in 2005.
That’s, in part, because new build is bigger build.
Houses under 1,800 square feet make up 21% of building, down from 37% in 1999. The share of homes built over 3,000 square feet, however, has jumped 14 percentage points in that same timeframe, from 17% to 31%.
Also a concern: other people like me jumping into the housing market. As evidenced by housing supply, this is a seller’s market. As more millennials enter, won’t things tighten further? As rates rise, larger homes are built, and distressed sales slow, homebuying will only get more expensive in the foreseeable future. Will prices continue to rise? Will I rent for the rest of my life to live where I want? What can I do other than wait until I’ve saved enough?
Dear Mom and Dad, please send money.