Last week, ATTOM data Solutions, curator of the nation’s largest multi-sourced property database, reported that nearly 1 in 4 (22.8%) of all purchase loan originations in our country now require a co-borrower(s)’ credit to afford the loan approved. Co-borrowers are multiple, non-married borrowers listed on the mortgage. In some of the nation’s top real estate markets – which are coincidentally some of the most expensive with rapidly rising home prices – co-borrower rates are eye-popping: half of all new home loans in San Jose now needs a co-borrower’s credit to satisfy the loan requirement (51%), nearly half in Miami (45%), 39% in Seattle, 31% in Los Angeles and 29% in San Diego.
It begs the question: can these new homebuyers actually afford the homes they buy?
Co-borrowing is at a high as home affordability decreases
Take Seattle for example, where nearly 4 in 10 new single-family home loans now have a co-borrower on paper. In a market where home prices are rising at more than twice the national rate and where median home prices had doubled in just five years, presumably many of these co-borrowing cases are adult children relying on parents’ rising home equities and credit to qualify for their loan. But until they sell their home and cash out their equities, do these new homebuyers’ parents or other co-borrowers actually have the income to help support the loan payments for the next 30 or 5 years? What if something happens to the local housing market that affects the co-borrowers’ net worth? Say, a bombshell announcement by a tech giant that it could cap its local growth in Seattle?
The truth is, this is not a scenario unique to Seattle or Miami. According to ValueInsured’s latest Modern Homebuyer Survey – conducted quarterly with a nationally represented sample of homebuyers and homeowners – 62% of all Millennials in the U.S. now believe parents should have a financial responsibility to help fund their adult children’s home purchase. Perhaps not coincidentally, the rate is higher in areas with more rapidly rising home prices:
- 72% of Millennial homebuyers in urban markets believe parents should help fund their adult children’s home purchase, compared to 50% of Millennial homebuyers in suburban markets and 45% in rural markets who believe the same.
- 74% of Millennial homebuyers in California and 70% in Washington State believe parents should help their children buy homes.
- Nationally, 62% of Millennial homebuyers believe their parents should help in ValueInsured’s latest July survey, up 7 percentage points from the survey’s April findings, as the FHFA's House Price Index rose 6.6% in the second quarter. As a point of reference, in the same period, wages grew by 0.5% in Q2 2017.
Today, 34% of Millennial homebuyers say they plan to rely on family to help fund their next down payment. What may be more surprising is that even among Gen Xers, 29% say they will need family help to fund their next down payment. Remember Gen-Xers often have the added burden of paying for college tuition, which is on average rising at double the inflation rate.
In ValueInsured’s survey, 67% of all Millennials now say they are seeing more people around them overleveraging themselves to buy homes they cannot afford. Historically, when homeowners are stretched too thin, they sell their homes when they can no longer afford their payments. Today, with over 60% of first-time homebuyers paying only 6% or less down payment, according to latest data from NAR, the risks of being upside down is higher if the market corrects.
It’s a decade past 2007 and mortgage lending has been tightened to help ensure homes are sold to buyers who can afford them. But judging by the pace of wage growth and home price growth, there are nagging concerns that not all homebuyers today – perhaps less than half in San Jose – can afford the home they buy.