What do the lengths today’s young adults must sometimes go to in order to assemble a down payment to buy a house and the rising rate of bankruptcy among older Americans have in common? More than you may think.
I hope young folks are paying attention to their elders, because these stories are two ends of the same path.
There are many reasons that today’s young adults have a harder time saving for the customary 20 percent down payment – or any down payment at all. No, avocado toast isn’t among them, but the list does include a tight housing market and ballooning educational debt. Some young adults are choosing to delay home ownership in order to put in longer hours at their downtown offices (or hangouts), but for many, putting together a down payment seems out of reach regardless of their urban or suburban preferences.
There are new options emerging to try to help these young adults, as The Wall Street Journal reported not long ago. The first is crowdfunding. As with any crowdfunding effort, this basically entails going to friends, family members and sometimes strangers and asking for their help in the form of gifts. HomeFundMe, a platform designed for these campaigns, encourages prospective homeowners to use their Facebook accounts to reach the widest number of potential contributors, and also includes a function for using a wedding registry to encourage down payment contributions. Supporters can make gifts with no strings attached, or conditional gifts that will only go to the recipients if they purchase a home. Like any crowdfunding effort, the success of a campaign rests largely on a recipient’s ability to tell a compelling story and a given social network’s tolerance for solicitations.
Passing the hat is not the only option. Loftium, a startup that currently restricts its services to the Seattle area, says it will contribute up to $50,000 to a down payment for people who agree to rent out one of their rooms on Airbnb and share the resulting income. There are less Silicon Valley-ready options too. Companies including Unison Agreement Corp. and Landed Inc. offer contracts in which they contribute toward down payments in exchange for the buyer’s agreement to pledge part of the home’s appreciation to investors such as pension funds. Some banks allow young adults to secure a mortgage with no down payment at all if their parents are willing to pledge investment assets as collateral. And large numbers of young adults have reportedly tapped their retirement accounts in order to buy their first home.
These options have different upsides and downsides, and they may make sense for some buyers. But all of them ultimately point to the same question: What happens after these young people become homeowners?
As The Wall Street Journal observed in its coverage, some of these options could exacerbate an already tough housing market if they succeed on a broad scale. And for buyers who put little of their own money into a home, the temptation to walk away may be greater if home prices fall. Tapping a 401(k) or other retirement accounts can have additional downsides in the form of forgone investment growth and potential penalties if the borrower fails to pay back a retirement plan loan on time.
This brings us to the second news item, a New York Times article that focused on recently released research indicating a rising number of bankruptcies among people 65 and older. Like low rates of homeownership in young adults, this trend does not have a single cause; culprits include faltering public pension plans, inadequate personal savings, and rising costs for health care and long term care. But one of the largest changes relative to previous generations is the amount of debt Americans in their 60s and 70s continue to carry – including mortgages. According to an analysis by the Urban Institute, about 41 percent of older Americans carried mortgage debt into retirement in 2016, compared with 21 percent in 1989.
Home equity is a form of savings that should act as a crucial financial shock absorber in retirement, but only if homeowners actually build equity. Home equity loans and cash-out refinancing turned many individuals’ houses into cash machines during their working years. Now those equity savings accounts, in many cases, are nearly empty. If a retiree is still making mortgage payments, something has probably gone wrong. Good financial planning should match debt with the earning capacity or the invested capital necessary to service it.
There is nothing inherently wrong with a young individual or couple getting into the housing market with little equity to invest. After all, there is nothing scary about taking on a 30-year mortgage obligation when you are 30 years old. But if you roll that obligation over to a new 30-year commitment when you are 40 or 50, you are setting yourself up for problems when you are in your 60s and 70s and still making payments.
Practically nobody goes bankrupt solely because of too little income; people go bankrupt because they have too much debt. Young folks scrambling to buy that first house should learn from their elders’ too-common mistakes. Pay off your credit cards every month. Pay off your student loans as soon as you can. Put sufficient money into your retirement accounts – and leave it there. As you build equity in your home, don’t undo your thrift by tapping it thoughtlessly or for short-term benefit. If you refinance in middle age, do it on a shorter repayment schedule, so you can enjoy the benefits of your foresight in later years.
If we don’t learn from history, we doom ourselves to repeat it. There is a lot today’s young people can learn from the sad financial experiences of an older generation.