But is it sustainable?
Many young people can’t afford to buy their own homes. Yet, there was a time when people graduating from college could hold a reasonable expectation of home ownership. Since the bottom fell out of the housing market in 2009, home prices have been steadily increasing to a point where this expectation has become unrealistic. According to U.S. Census Bureau, home ownership rates for all age groups were lower in 2017 than in 2006, the year before the Great Recession; householders between 35 and 44 years of age showed rates 10 percentage points lower in 2017 than in 2006. Concurrently, the stagnation of wages in the U.S. over the last generation has told a bleak story, according to the Economic Policy Institute. Since 1979, while productivity has grown by 75 percent, the hourly median wage has grown less than 10 percent in real dollars, or an average annual raise of barely 4 cents per hour.
Against these formidable odds, however, some young people are actually doing it. How are they managing? We commissioned an economics consultancy to find out. We wanted to chart the unacknowledged, hard to detect, invisible financing that is keeping the dream of home ownership alive.
Enter The Bank of Mom and Dad—a force that, in the housing market, is roughly akin to bridge financing on a massive-yet-personal scale. We found out that last year, American parents and other family members and friends spent $47 billion helping their loved ones purchase $317 billion worth of homes. If the Bank of Mom and Dad were an actual financial institution, it would be the equivalent of the seventh largest mortgage lender in the U.S. Across the U.S., and across demographics, 20 percent of homeowners said they had received help from family and friends in order to buy the home they currently live in. Scaling that number up, this means that in 2018, family and friends helped in the purchase of 1.2 million homes.
Without the Bank of Mom and Dad, you’d be taking $317 billion out of the economy, which is roughly the equivalent of the GDP of Singapore. And you’ve also taken $47 billion out of the pockets of the older generation. While it’s been widely discussed that older Americans control most of the wealth, and in the case of better off Americans have a longer life expectancy, for many Bank of Mom and Dad “lenders,” there’s a price to pay. Among the lenders the research firm surveyed, 15 percent reported having to lower their standard of living—whether through delaying or coming out retirement, raiding their own IRAs and 401Ks, or refinancing their own homes—in order to help their loved ones. At some point, their responsibility should end—but in the current economic climate, it can’t. Older people’s sacrifice is every bit as unhealthy as younger people’s dependence.
This state of affairs is not sustainable, economically or socially. We need to jump off this hamster wheel of people being dependent on their parents indefinitely. A large part of the problem is that there’s simply not enough affordable housing. And across the board, younger people want to live in increasingly out-of-reach expensive urban areas. Middle class home buyers, especially those new to the market, are finding it unaffordable due to soaring housing prices and a lack of affordable housing stock on the market.
We’ve talked extensively about inclusive capitalism. The Bank of Mom and Dad research—and the reality that it points to—offers proof that it’s time for ethical free market forces to step in. One answer is to figure out new ways to build less expensively and expand affordable housing stock. Another is to invest in revitalizing the places where those houses will be. Business is now called upon to invest in infrastructure and technology infrastructure, especially in smaller, more affordable cities. Make these investments long-term, collaborative, and patient, with the goal of raising the overall quality of life and prosperity of the region and encouraging young people to stay/return and start their businesses there.
Then build housing for them. Even in smaller cities, you can begin to see micro-housing developments cropping up, so people can afford to buy a tiny property. Prefabricated housing has also come a long way from trailer homes, and should be thrown into the affordable mix.
Owning a house is widely considered to be the first step toward acquiring wealth in the form of an asset—but beyond that, it is a major step toward gaining social dignity and true democracy. Having huge swaths of people unable to buy—starting with those who don’t have The Bank of Mom and Dad at their disposal—widens the inequality. And that needs to be addressed and made right.
- Originally posted on Forbes