Affordable Housing Institute : US

Even as housing incubates families, and housing incubates household formation (and growth), the converse is likewise true: families incubate housing consumption.

 

Families hatching soon

Nowhere is this more evident than when young people seeking to grow their family and housing consumption confront the double hurdles of down payment and mortgage payment. In a chain of wealth hand-me-down that probably goes back a millennium, parents deliver money and credit to their children, who borrow from the Bank of Family, as illustrated in this New York Times article by Christine Haughney:

 

LIKE many parents, Madhu and Kishore Agrawal do whatever they can to help their children. For their 25-year-old daughter, Natasha, that help has ranged from sending her through Tufts University to watching her cat, the General, when she traveled to India to visit relatives late last year. Recently, they made the most financially demanding commitment so far: they are putting up most of the money to help her buy a two-bedroom penthouse apartment in Williamsburg, Brooklyn, for $900,000.

 

The Agrawals are helping their daughter for the explicit purpose of moving her into ‘independent’ living, free from everyone’s introduction to apartments, the dreaded roommates:

Space and privacy will be a big change for Ms. Agrawal, who now lives in a sixth-floor walk-up in Chelsea with three roommates …

 

 

We’ve all lived with them, haven’t we?

Swapping out five flights of stairs and fights over whose lettuce is whose sounds like heaven, doesn’t it?

… but it does not come without complications. Or, as some might say, strings.

 

Our family loan committee is scrutinizing your application

A normal lender cares only about creditworthiness, while the Bank of Family is much more intrusive:

In exchange for getting financial help from her parents, there are certain things she knows she cannot do: for instance, she cannot let her boyfriend move in.

I’ve previously posted on the primal psychological relationship between apartments and sex. Ms. Agrawal’s nights may be her own, but not her latchkeys.

She accepts that.

 

It’s the price credit, part of the inter-generational bargaining. Nor does Ms. Agrawal have another normal attribute of homeownership, unilateral control over how she uses her interior space:

 

More contentious is the matter of the couches she bought from a thrift store.

Behavioral change is the part of the collateral price of money.

Ms. Agrawal says the couches will be moving with her, because they will blend with the deep greens, yellows and oranges that she plans as the color themes for the new apartment. “It’s not like me having furniture I like will depreciate the value of the house.”

 

No, really, it’s a positive accessory

A sound collateral-protection argument that has apparently carried the day.

Conflicts like this are becoming more common in New York City real estate as more parents — not all of them wealthy — help their adult children with their first home purchases. A decade ago, younger New Yorkers were able to buy their own apartments. That’s because studios and one-bedrooms cost $150,000 or so.

I believe Ms. Haughney (whom I’ve met and like) is remembering a halcyon time that never existed.

 

Now, first-time buyers are paying nearly four times that for the same apartments, according to data from the Real Estate Board of New York.

Brokers say they see more buyers turning to their parents for help with $100,000 down payments or monthly mortgage payments, or for temporary loans to their bank accounts so that they can pass muster with certain co-op boards.

 

There is no co-op board so demanding and inquisitive as the Family Co-op, and like other co-op boards, this one is unelected, autocratic, and arbitrary. Wealth hath its privileges.

 

We make the rules around here

As a result, more parents are remembering how their own parents helped them, looking at their own financial situations and entering into complicated business partnerships with their adult children.

 

Parent-to-child loans for housing are one of the few gifts parents feel comfortable making while alive, for money plowed into a child’s home is very difficult to squander. As we’ve seen in other contexts, housing’s physicality and immobility distinguish it from other assets — housing provides comfort that the capital provided will have long-term value, a fact underscored by Ms. Agrawal’s wry comment about her probably-awful couches.

 

A housing-purchase loan also has financial and estate benefits: by financing the cash transfer as a loan, the parents avoid gift taxation; if they then forgive the loan at the maximum exempt annual gift rate (currently $22,000 per child for both parents), they can steadily shift money from their estate to their children. So we have both family formation and development, wealth transfer, and tax optimization.

 

Then there’s that non-financial price: dealing with the Bank of Family’s loan committee:

Ms. Blackburn, too, finds that most of these arrangements carry conditions.

“The girls are not allowed to have the boyfriend move in,” she said. “With the sons, they expect them to have roommates.”

Not just conjugation and cohabitation

 

In many cases, [parents] are expecting some control over the furniture, the appliances and even how often they can use the apartments for their own visits to New York.

 

“There are a lot of stipulations in these deals,” said Amy Herman, a Halstead Property agent who has represented about three dozen parents helping their adult children buy apartments in the past five years. “They gift with a caveat.”

 

She said that only one of these deals closed smoothly and that many brokers no longer represent parents and adult children. “It’s just very time-consuming.”

Brokers paid on commission are fundamentally pro-transaction: they want closings and nothing else will do. Family counseling on contingency?

 

More buyers are turning to therapists to help them work through how they feel about depending financially on their parents when they have carved out independent careers and lives.

 

Observe the clash of id and superego: the superego claims it is independent, but the id knows different.

 

“I am an individual!”

It’s not merely the children whose emotions are tangled — parents too revert to their inner child:

Parents who lend money to help their adult children can make demands that include:

· Becoming engaged to the person they are living with, he said, or

· Signing prenuptial agreements allowing them to keep the real estate in their names.

He finds that no matter how generous parents may be, their children can feel embarrassed that they can’t afford to pay for their own housing.

“Even if the parents gift money, there is an emotional connection to the money that’s given,” Dr. Shadick said.

Money, Warren Buffett has said, is a claim on the future earnings of others. Parting from it is, psychologically, a transfer of one’s own future to one’s children.

 

Time passes from my future to yours

“A recipient may feel that they are not able to do it on their own and that they’re less of an adult. Part of the issue is the cultural trend of delaying separation with their children, and the other part is the high cost of real estate in New York.”

It’s not just co-signing, but also down payments:

 

According to the National Association of Realtors, 45% of first-time buyers nationwide put no money down, but in New York City most condominiums require down payments of 10%, and most co-ops require 20%.

 

In many cases, parents make loans to their children under the assumption that New York City real estate will continue to rise in value. But because there is no guarantee that it will, Asheesh Advani, a former World Bank consultant who founded CircleLending Inc., a Waltham, Mass., company that organizes all types of loans among relatives, says that adult children should treat loans from their parents like loans from banks.

 

Because both the lender and borrower are amateurs — parents are amateur lenders and children are amateur, not professional, borrowers — they can tacitly agree to disagree.

[Continued tomorrow in Part 2.]

Send post as PDF to