THE IMPACT OF FINANCIAL HELP AND GIFTS ON HOUSING DEMAND AND COST BURDENS

I. INTRODUCTION Financial transfers are an important source of income for many households. In 1997, over 7.2 million people provided financial support to individuals outside the immediate family (U.S. Census Bureau, 2002). The recipients may receive financial support in the form of financial help or substantial gifts. Regardless of the form, recipients may use these funds to pay for housing services. Indeed, housing is one of the largest categories of personal expenditure (U.S. Census Bureau, 2006); therefore, it is important to understand how financial transfers impact housing demand and whether or not households respond differently to the type of financial aid received as suggested by previous research (Withers and Reid, 2005). Twenty-five percent of all first-time home buyers receive some form of financial aid from relatives for a down payment (Mayer and Engelhardt, 1996), and the average amount is nearly one-half of the total down payment (Engelhardt and Mayer, 1994). Research also suggests, however, that the entirety of financial transfers is not used to increase down payments and thus reduce the amount borrowed (Guiso and Jappelli, 2002). In fact, households receiving monetary aid spend more, on average, on housing and have higher obligation ratios, (1) which implies households may be using the funds to buy more expensive homes (Engelhardt and Mayer, 1995; Luea and Turner, 2007a; Mayer and Engelhardt, 1996). This has implications for the mortgage industry and the long-term financial health of households. Do financial transfers negatively impact recipient households by facilitating greater housing consumption and thus inducing a larger financial burden? Furthermore, does a household respond differently to varying types of financial transfers? Previous research has examined the impact of transfers on the home purchase decision (Engelhardt and Mayer 1995; Guiso and Jappelli, 2002; Helderman and Mulder, 2007; Henretta, 1984; Mayer and Engelhardt, 1996; Withers and Reid, 2005), the motivation for transfers (MacDonald and Koh, 2003; Schoeni, 1997), the impact of transfers on wealth (Hao, 1996), and the relationship between transfers and liquidity and credit constraints (Cox, 1990; Cox and Jappelli, 1990; Engelhardt and Mayer, 1994). Most recently, Helderman and Mulder (2007) examine the role of gifts and market characteristics in the intergenerational transmission of homeownership. Their study is unique in that it uses both financial transfers and parental housing market characteristics to examine the probability of child homeownership. Using the Netherlands Kinship Panel Study, they find that, although receiving gifts has a strong and significant impact on child homeownership, similarities in child and parent housing market conditions also play a significant role in child homeownership. Their study is important because it suggests the role of gifts in the ownership decision may be overstated and that other factors may contribute to the housing purchase decision. Their study, however, examines only gifts specifically intended for home purchase and does not investigate the impact of other financial transfers (Helderman and Mulder, 2007). A 2005 Withers and Reid study is the only study, to my knowledge, that examines the impact of different types of financial aid on homeownership. Using the Panel Study of Income Dynamics (PSID), they follow households from 1984 to 1989 and examine the impact of inheritances, parental gifts, and other monetary payments, such as help from relatives and insurance settlements, on the probability of homeownership. They find that households who receive any monetary aid are only 1.2 times more likely to purchase a home than those not receiving monetary aid. However, households receiving $5,000 or more are 2.3 times more likely to purchase a home than those not receiving financial transfers. Interestingly, they also find that households receiving financial help from relatives are less likely to become homeowners and thus the authors conclude that financial help received from relatives is likely not used for large expenditures such as home purchases (Withers and Reid, 2005). …