Tapping into monetary gifts and family financing can be a creative – and caring – way to help loved ones get the home they want.

Real estate is one of the most effective ways that families build, generate and protect their wealth. Home appreciation offers cash equity, vacation and investment properties bring consistent revenue streams, and multigenerational living allows extended family to share expenses.

But with rising home prices, interest rates the highest they have been in a generation, and a lot of graduates carrying significant college loans (often for decades), it can be difficult if not outright impossible for new buyers to fund the purchase of a first home. According to the most recent report from the National Association of Realtors, the share of first-time home buyers in 2022 dropped to a record low of 26%, while the age of a typical first-time buyer increased to an all-time high of 36 years old, in part due to the time it takes to save for a down payment. 

So, how can parents, guardians and caregivers help the next generation get to that first rung of the home investment ladder? Here are a few important family financial strategies that can guide cash-strapped relatives to the home of their dreams.

Family as Landlord – It’s often the lament of would-be Empty Nesters: a kiddo moves back home after school, during a break-up, or, more recently, into a COVID-19 bubble and just never left. Yet, all this togetherness can be a great opportunity for lessons on budgeting, saving and investing. Assuming your live-in lodger has an income, charge a small but fair amount for rent and household expenses that will be put into savings or an investment account to be used as a down payment. It may take time for this nest egg to grow but with each deposit the goal of moving on will be closer and the practice of regular saving will pay off in the long run.

Give Money – Monetary gifts for a down payment are the easiest way to assist a family member with a home purchase and can be tax free within IRS guidelines. Gifts must come from immediate family – parents, siblings, grandparents, spouse or even a partner (if engaged to be married) – and there can’t be a plan for repayment, so nothing with “strings attached.” This will be spelled out in a gift letter that will be shared with the lender. Current monetary limits are $15,000 per person buying a home, meaning if a purchase has two buyers then there can be $30,000 in gifts. Discuss any gifts with your lender to ensure they are documented properly and used accordingly.

Finance the Mortgage – Someone looking to park their cash in real estate can make it work for the greater family good and act as the lender, funding the purchase but without additional fees and a reduced interest rate. Family lenders must charge at least the Applicable Federal Rate (AFR), the minimum interest rate required to keep the assistance from being considered a gift. These rates are almost always much less than the current market rate and are three AFR tiers based on the repayment term of a family loan:

1. Short-term rates, for loans with a repayment term up to three years.
2. Mid-term rates, for loans with a repayment term between three and nine years.
3. Long-term rates, for loans with a repayment term greater than nine years.

Rates change monthly. For example, the short-term rate for May 2023 is 4.30% (for April it was 4.86% and for March it was 4.50%); mid-term rate for May 2023 is 3.57% (for April it was 4.15% and March was 3.70%); and long-term rate for May 2023 is 3.72% (for April it was 4.02% and March was 3.74%) (Figures from NationalFamilyMortgage.com as of April 24, 2023). Before finalizing a family loan be sure to consult with an accountant or tax authority for any potential tax liability.

Co-Sign the Mortgage – Being a signatory on any debt can have risks, but sometimes it’s the fastest way to get to the settlement table. When co-signing a mortgage, the bank will take all borrowers income, assets, debts and credit worthiness into account and hold all parties equally liable. This is where having a clear and mutually agreed upon plan is critical as missed payments or a default on the loan will negatively affect all parties. Co-signers do not have to be on title, but it might be in their interest to be named on the deed so that they are co-owners and not just co-borrowers, giving them more say in management of the home as an asset.  

Family as Landlord, Part 2 – Buying a home for a relative to rent is another win-win option, especially if the payment is going to a rent-to-own situation where a portion of the rent is banked toward equity in the home, or for down payment on the purchase of another property.  For example, parents who buy a home and allow their child to live in it might be able to take tax deductions on property taxes, mortgage interest, repairs, maintenance, and structural improvements. Check IRS guidelines to determine rent requirements vs. personal use so there are no tax surprises.

It Takes a Village – It’s not for everyone, but bringing several relatives under one roof can be a windfall in more ways than one. Multi-generational living is nothing new, with benefits like convenient & trusted childcare, shared expenses and the ability to “age in place” giving families support and a safety net to help through life’s joys and challenges. Pooling resources among relatives increases buying power and can offer different options for what the living structure will look like: a larger traditional home, a multi-unit building where the family lives in one part and rents out the other, or a large tract of land where family dwellings can be built close together and share a common space.

As with any financial arrangement, it is important that all parties are clear about expectations and responsibilities. This is even more important with family members where emotions and personal history can have an outsized influence.

But when looking at ways to help the next generation get on the road to home ownership, sometimes it is the case that “family knows best.”

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If you know how to read them, sales and inventory statistics reveal what is really happening in the local real estate market.

Listening to the news, it’s easy to be confused about what is really happening in real estate. Some analysts predict a crash, others say there’s no end in sight to rising prices, and others hold their fingers to the wind and take a check whenever interest rates rise and fall.

But if you are a buyer or seller and want the best strategy for your needs, where do you get real answers?

David Howell, McEnearney Associates’ Executive Vice President & Chief Information Office, gave a deep dive discussion on statistics to help address the questions and concerns that clients are sharing with their agents.

 “It’s easy to get discouraged if one is a buyer or seller by some of the national headlines and media that talk about how terrible the market is,” Howell observed of news coverage of rising interest rates and other challenges, but he noted that, “We have the good fortune of being in a metropolitan area that is probably among the strongest residential real estate markets anywhere in the country.”

 “We don’t want clients to make decisions based on fear or inappropriate information about what’s really going on in the market,” Howell said. There are still opportunities at every level of the market to make a great deal come together, if you know where to look.

 Here are a few of the takeaways.

 Is the DC/MD/VA Housing Market Really Crashing?

The DC-Metro area is one of the strongest housing markets in the nation, thanks to many factors including our employment anchors – government, technology, military, media – that keep people moving steadily into and out of our region. Howell shared that our region was never as overheated as some markets elsewhere in the country like Austin (ex: recent +350% increase in inventory should push prices down), Phoenix, Las Vegas and others.

 Looking at Northern Virginia in February, for example, 43 percent of homes sold at or above the original list price. Howell added that at this time last year housing inventory was at less than a half-month’s supply and that still remains the case today. A four-month supply of housing is generally considered the threshold of a “balanced” market and we are nowhere near that in any price point in any jurisdiction throughout our region, Howell shared. DC has the highest at 2.2 months inventory.

 “This is in fact a Seller’s Market,” Howell said. “Buyers need to know that in terms of negotiation strategy, sellers need to know it because it’s an incredible opportunity if they price right.”

 Price Matters & Time Kills

Even in a strong seller’s market, proper initial pricing is more important than ever before. “If you price it right, you’re likely to be rewarded in a significant way. If you price it wrong in the beginning, you’re likely to get hammered in a significant way,” Howell said.

 And if a listing is not getting offers within the first three weeks, the market is telling you that the price is wrong.

 For February 2023, in Northern Virginia 43 percent of homes sold an average 3 percent at or above list price in an average of 13 days, while the remaining 57 percent of homes sold an average 5 percent below list price in an average of 63 days. In other areas the numbers showed a similar trend, with an overall difference of about 10 percent between pricing right and pricing too high:

• DC – 27 percent of homes sold an average of 3 percent above list in 21 days while the remaining 73 percent sold at nearly 7 percent below list price and in an average of 85 days.
• Montgomery County – 44 percent of homes sold an average of 4 percent above list in 12 days while the remaining 56 percent sold at 6 percent below list price and in an average of 64 days.
• Prince Georges County – 27 percent of homes sold an average of 4 percent above list in 19 days while the remaining 73 percent sold at more than 5 percent below list price in an average of 56 days.
• Loudoun County – 44 percent of homes sold an average of 3 percent above list in 14 days while the remaining 56 percent sold at almost 6 percent below list price in an average of 64 days.

 And it’s not just the sales price that some sellers took a hit on, Howell noted. When you factor in the months of carrying costs (mortgage, taxes, utilities, homeowner fees, etc) sellers who initially overpriced their home netted significantly less overall.

 Buyers, Don’t Give Up!

The combination of rising home prices and rising interest rates means that buying a home in this area today is about 40 percent more expensive in terms of monthly costs than a year ago. It’s no surprise there’s been a drawback in buyer activity, simply because many people have been priced out of the market.

 And Howell said, with few exceptions, prices are not coming down. “The inescapable reality is there is not enough quality supply to reach the limited demand there is… If you believe that home prices are coming down, it’s OK to have that belief but the data does not support that belief.” And waiting could be a very expensive mistake.

 But, looking at the statistics above about pricing, more than half of the homes on the market are taking more than two months to sell and are selling at a discount. Consider searching for homes that have been on the market longer than three weeks for an opportunity at a price reduction and better negotiating terms, like home inspection and other contingencies.

 One Last Stat About Off-Market Sales

BrightMLS, one of the largest Multiple Listing Service databases in the industry, tracks listings and sales and is a wealth of statistical data. Off-market sales — properties sold without being listed through an MLS or sold privately or without the assistance of an agent – account for 15 percent of the market and are by nature difficult to track. However, Howell shared that from the data BrightMLS has collected, 80 percent of homes that initially started as “private exclusives” end up as active properties in BrightMLS and do not sell off-market.

 Howell added that Bright MLS and external research partners examined differences in the prices of properties sold on and off the MLS and concluded that listings available to the public netted 16 percent more going through MLS than selling off-market. Howell explained that this doesn’t mean that off-market sales aren’t right for some sellers, but statistics show that sellers will net more money by listing their home publicly than only to a small subset of buyers.

 Remember, when you hear doomsday national media declare the real estate market is in dire straits, there is no such thing as a “national” real estate market…all real estate is LOCAL! Keep track of what’s happening in your market with McEnearney’s Market in a Minute, Weekly Meter, Market Reports and McEnearney Blog updates, and consult with a McEnearney Associate to understand the statistics in your neighborhood and be informed, not afraid.

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It’s the news that set Arlington County abuzz and could be coming to a neighborhood near you, but what exactly is “The Missing Middle” and how will it affect local real estate?

After years of debate, the Arlington County Board unanimously voted 5-0 on Wednesday (March 22) to expand housing options in portions of the county that currently only allow single-family detached homes. The changes will take effect July 1, 2023 and per the County press release, the passage of the zoning amendment “will allow for Expanded Housing Options (EHO) development for up to 6 units per residential lot—if certain conditions are met, including the same building height, setbacks, and size as allowed for single-detached homes.”

The initiative came in response to the lack of housing inventory – especially affordable housing; from March 2022 to March 2023 single family detached homes in Arlington sold at a median price of $1,167,000 and an average sales price of $1,315,000 – and encountered passionate discussion for and against the plan. 

Those in favor of the amendment pointed to the fact that 75% of land zoned residential in Arlington is exclusively for single-family, detached homes, leaving a large portion of the population, including many communities with diverse demographics, with limited housing options. Those opposed had concerns about overcrowding, construction that was out of place with existing homes, and declining property values for homes next to multiplex construction. Both sides are unsure about unintended consequences to county infrastructure such as utilities, schools, parking and traffic.

While Arlington County is the first local jurisdiction to adopt a “Missing Middle” strategy, it’s an acute crisis in dense cities nationwide and local governments are moving to end outdated zoning regulations that were often enacted on the basis of racial discrimination and segregation. The Washington Post recently reported “the push to relax zoning rules, first implemented in cities such as Minneapolis and Portland, Ore., marks something of a departure from Arlington’s existing ‘smart growth’ philosophy, which encouraged density along mass-transit lines but generally kept it to a minimum everywhere else.” 

It is expected the “Missing Middle” debate will be taken up throughout the DC-Metro area as inventory continues to decline and more and more buyers and renters enter the market. Demographically, there are at least five generations of buyers or sellers of real estate, ranging from Gen Z (upper range is age 26) to Post War (lowest range is age 78). 

Rising construction costs due to inflation and supply chain issues and recent halts in new home construction (mid-2000’s and the Covid-19 pandemic) means more competition for existing homes while the hike in interest rates in 2022 meant many would-be sellers are staying put. In short, there are not enough homes for the people who need them and the homes that are available are often out of the price-range for Arlington citizens. 

This is a continuing story and McEnearney Associates will be reporting on updates throughout the year.

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