Family Altruism Sustains Illiquid Homeownership

 The sources quantify the impact of parental transfers, often referred to as the "Bank of Mom and Dad," primarily by calculating the counterfactual homeownership rates for young households in the absence of such transfers, utilizing a life-cycle overlapping generations model.

Core Quantification of Impact

The central finding quantifying the importance of parental transfers is that they account for a substantial portion of the homeownership rate among young households:

1. Contribution to Young Homeownership: Parental transfers account for 13 percentage points (27%) of the homeownership rate among young households (ages 25 to 44).
2. Mechanism and Timing: When the model is simulated without altruistic transfers, the homeownership rate declines by 13 percentage points. This suggests that the main aggregate effect of parental transfers is that they induce earlier homeownership. Without altruism, the average wealth needed to purchase a home increases by about 25%, and the age of first ownership is delayed by approximately 2.5 years.
3. Aggregate Effect: While the decline in homeownership for young households is steep (27%), the overall homeownership rate (for ages 25 to 74) falls by 6 percentage points (9%) without transfers.
4. Quantifying the Parental Wealth Gradient: The model demonstrates that the positive correlation between parental wealth and housing outcomes is almost entirely driven by parental transfers. The parental wealth gradient in homeownership decreases sharply from 2.0 to 1.15 when altruism is removed from the model.

Quantification in the Context of Racial Gaps

The model's framework was applied to quantify the specific contribution of parental transfers to the Black-White homeownership gap among young adults:

• The quantification finds that parental transfers account for 11 percentage points (20%) of the Black-White homeownership gap, which is observed at about 51% among young adults.
• This calculation helps bridge the gap between structural models of racial inequality and empirical studies highlighting the role of parental wealth in housing outcomes.

Quantification Methodology and Robustness

The quantification relies on building and estimating a dynamic life-cycle overlapping generations model with housing, where altruistic parents and children interact without commitment. This structural model provides a disciplined framework necessary to establish the overall importance of parental transfers.

• Illiquid Homeownership: The model incorporates the illiquidity of housing, which is crucial because transfers from wealthy parents mitigate the drawbacks of this illiquidity. Future transfers provide partial insurance against income shocks, reducing the risk associated with the large illiquid investment of homeownership.
• Robustness: The core quantification remains robust even when housing supply is considered endogenous and prices are allowed to adjust. When assuming a low aggregate supply elasticity, transfers still account for between 10 and 13 percentage points of the homeownership rate.

Quantification of Policy Impacts

The sources also quantify how policies designed to affect homeownership interact with parental transfers, illustrating that policies intended to raise homeownership can unintentionally amplify housing inequality:

• Relaxing Borrowing Constraints: Policies that relax borrowing constraints, such as lowering the minimum down payments (or lowering PMI requirements), generally increase the reliance on parental wealth and strengthen the link between parental wealth and children's housing outcomes.
• Reducing Sales Costs (Liquidity): Conversely, policies that increase housing liquidity by reducing sales costs weaken the commitment value of housing used to secure transfers, and thus, reduce the reliance on parental wealth. Strikingly, reducing sales costs by 2 percentage points caused the overall homeownership rate to decrease by 3 percentage points (6%) in the model

The sources identify several key mechanisms through which parental transfers influence young households' decisions regarding illiquid homeownership, integrating financial assistance, risk mitigation, and strategic intergenerational behavior.

1. Alleviating Credit Constraints (Entry Mechanism)

One primary mechanism is the direct use of transfers to overcome financial barriers necessary for purchasing a home:

• Parental transfers can directly alleviate credit constraints, specifically enabling children to meet down-payment requirements.
• The empirical literature highlights that parental transfers relax credit constraints, increasing the probability of becoming a homeowner.
• In the structural model, a transfer increases the child's wealth, which can push the child above the wealth threshold required for homeownership. Transfers also alleviate the loan-to-value (LTV) constraint by increasing the child's bond position,.
• Policies designed to relax borrowing constraints (like lowering minimum down payments) generally increase the reliance on parental wealth, strengthening the link between parental wealth and children's housing outcomes, since more households with wealthy parents are brought to the margin of ownership,,.

2. Mitigating Illiquidity Risks (Maintenance and Insurance Mechanism)

Beyond the initial purchase, parental transfers mitigate the persistent risks associated with holding housing, which is often the largest and most illiquid asset in household portfolios,.

• Transfers from wealthy parents help sustain homeownership by mitigating the drawbacks of illiquidity.
• The prospect of future transfers provides partial insurance against future income shocks, which reduces the financial risks associated with the large, illiquid investment of homeownership,,.
• This insurance mechanism is critical for maintaining homeownership for liquidity-constrained households, a role the sources suggest is as important as relaxing borrowing constraints.
• The model rationalizes the empirical observation that households with wealthy parents do not downsize during income losses (such as unemployment spells), while those with less wealthy parents do,,.
• The data supports this mechanism by showing that households with wealthier parents are less likely to fall behind on mortgage payments, suggesting parental resources provide insurance against income shocks that could otherwise trigger costly distressed sales,,.

3. Strategic Use of Illiquidity (Commitment Mechanism)

The interaction between altruistic transfers and the illiquid nature of housing creates unique strategic incentives for the children:

• The illiquidity of housing, specifically the costs associated with selling a home (sales costs), serves as a commitment device that adult children can strategically use to encourage future parental transfers,,.
• By purchasing an illiquid asset (a home) and holding low liquid wealth, the child effectively commits to having a high marginal utility of wealth in the subsequent period,.
• The parent, being altruistic, internalizes that if they do not provide a transfer, the child may be forced to liquidate the house and incur high sales costs, or face very low consumption. Because the parent dislikes these outcomes, this strategic behavior strengthens the parent’s transfer motive.
• This mechanism results in a counterintuitive finding: 22% of young households prefer illiquid housing over liquid housing because parental wealth generates this preference for illiquidity,. These households tend to have parents who are approximately three times wealthier and are more likely to receive larger transfers.

The sources rely heavily on data from the Panel Study of Income Dynamics (PSID) to provide empirical support for the role of parental transfers ("Bank of Mom and Dad") in illiquid homeownership, particularly concerning both the initial transition into ownership and the subsequent ability to retain that ownership.

PSID as the Core Data Source

The PSID is utilized as the main data source because it uniquely satisfies the requirement of having detailed wealth, income, and housing data for both parents and adult children, contains information about inter-vivos transfers, and follows households over time, allowing researchers to observe transitions from renting to owning. The analysis focuses on households aged 25 to 44, using data collected between 1999 and 2021.

Empirical Support for Transfers and Homeownership Entry

The PSID data confirms the widely observed association between parental wealth and the entry into homeownership:

• Prevalence of Transfers: Among young households (ages 25-44), 21% received a transfer in 2012. The largest determinant of transfer receipt is parental wealth, as transferring parents were 2.5 times wealthier than nontransferring parents.
• Facilitating Transition: Transfers ease the transition into ownership. Households that received transfers were more likely to transition from renting to owning. Specifically, among current owners, 21% of transfer recipients had been renters two years earlier, compared with 14% of nonreceivers.
• Impact of Large Transfers: Using a broad definition of large transfers (above $10,000), transfer receipt is associated with a substantial and statistically significant 7.9 percentage point increase in the probability of becoming a homeowner, relative to the baseline rent-to-own transition rate of 18%.

Empirical Support for Mitigating Illiquidity (Retention and Insurance)

The sources provide novel empirical evidence from the PSID supporting the mechanism that parental wealth acts as a form of insurance, mitigating the risks and drawbacks of holding illiquid home equity after the purchase:

1. Ownership Retention: Parental wealth is shown to be crucial for maintaining ownership. The positive association between parental wealth and sustained ownership is found to be at least as predictive as the household's own net worth. For first-time owners, a 10% increase in parental wealth raises the probability of retaining ownership after eight years by about 0.45 percentage points.
2. Delinquency Mitigation: Households with wealthier parents are less likely to fall behind on their mortgage payments. The probability of falling behind on payments declines with parental wealth, which is consistent with the idea that parental resources offer insurance against income shocks.
3. Downsizing Avoidance: Using an event study comparing households around unemployment spells, the PSID data shows that households with less wealthy parents tend to downsize their housing (with housing consumption falling about 5%) during unemployment. In sharp contrast, households with wealthy parents retain their current homes and do not exhibit a statistically significant decline in housing consumption. This pattern suggests that homeowners with wealthy parents find the illiquidity associated with homeownership less problematic.

In summary, the PSID data validates the core assumption that parental resources are associated with better housing outcomes, providing quantitative evidence that goes beyond merely facilitating the initial down payment to demonstrate that parental transfers function as a crucial post-purchase insurance mechanism against the illiquid nature of the asset.

The sources extensively discuss how policy interventions aimed at influencing homeownership interact with parental transfers, often leading to unintended consequences regarding dependence on parental wealth and housing inequality.

The general finding is that policies lowering entry barriers to homeownership typically increase the reliance on parental wealth, while policies that reduce the drawbacks of housing illiquidity decrease that reliance.

1. Policies Affecting Borrowing Constraints (Entry Barriers)

Policies that relax financial hurdles for purchasing a home tend to amplify the role of parental wealth, primarily because these households are often brought to the margin of ownership where a transfer makes the critical difference.

• Tighter Loan-to-Value (LTV) Limits (Macroprudential Tool): When the LTV limit is tightened (e.g., by 3 percentage points), homeownership falls significantly (by 15% for young households). This change flattens the parental wealth gradient because middle-wealth households, who rely on modest transfers to clear borrowing constraints, are constrained further. Symmetrically, loosening LTV constraints would strengthen the link between parental wealth and children's housing outcomes, as it brings more wealthy-parent households to the margin of ownership.
• Lowering Private Mortgage Insurance (PMI) Limits: Relaxing the PMI limit (e.g., by 7 percentage points) modestly increases homeownership (by 2%). However, the gains are concentrated among households whose parents are in the middle of the wealth distribution, widening the parental-wealth gradient. This demonstrates that relaxing PMI increases both overall homeownership and the importance of parental wealth.

2. Non-Mortgage Policies (Entry Barriers)

Policies that reduce the price or purchase costs of housing also tend to disproportionately favor those with wealthy parents:

• Lowering House Prices (Reduced Form): When house prices are lowered by 2% (mimicking effects of supply regulation or subsidies), homeownership increases for all households, but disproportionately for those with the richest parents, thereby increasing the overall role of parental wealth.
• Reducing Purchase Costs (First-Time Buyer Grants): Lowering the purchase cost (e.g., by reducing it by 2 percentage points, equivalent to a grant of about $6,000) also results in gains concentrated among households with wealthy parents. For renters with non-wealthy parents, this policy has little effect as they remain constrained by LTV limits and sales costs, while for those with rich parents, it reduces the main remaining barrier to ownership. These results suggest that first-time buyer grants or credits may primarily benefit households with richer parents and could unintentionally widen housing inequality.

3. Policies Affecting Illiquidity (Sales Costs)

Policies that increase the liquidity of housing, by reducing the costs associated with selling, have the opposite effect: they diminish the importance of the "Bank of Mom and Dad" as an insurance mechanism.

• Reducing Sales Costs (Increasing Liquidity): Lowering sales costs (e.g., by 2 percentage points) weakens the commitment value of housing used to secure future transfers.
• Impact on Homeownership and Inequality: Strikingly, reducing sales costs can cause the overall homeownership rate to decrease by 3 percentage points (6%). This drop is concentrated among households with moderately wealthy parents, for whom the commitment device mechanism is most relevant. For the children of the poorest and wealthiest parents, the impact is less significant because the poorest rarely receive transfers and the wealthiest expect transfers regardless.

Summary of Policy Implications

Policies designed to raise homeownership, such as relaxing credit constraints or subsidizing purchase costs, can strengthen the link between parental wealth and housing outcomes. Conversely, increasing housing liquidity by reducing sales costs reduces the importance of parental wealth, potentially weakening the commitment device that wealthy-parent children use to secure future transfers. Furthermore, broad-based down payment subsidies may unintentionally widen the Black–White homeownership gap due to differential reliance on parental income and wealth.

The sources detail several significant behavioral and economic effects stemming from the interaction between parental transfers ("Bank of Mom and Dad") and illiquid homeownership, revolving around strategic decision-making, wealth accumulation, risk management, and aggregate consumption responses.

1. Strategic Behavior and the Preference for Illiquidity

A key behavioral finding is the strategic use of illiquid homeownership by adult children to secure future transfers:

• Commitment Device: Children with wealthy parents can strategically use the illiquidity of housing as a commitment device to encourage transfers from their parents.
• Mechanism: By purchasing an illiquid asset (a home) and holding low liquid wealth, the child commits to having a high marginal utility of wealth in the following period. Since the altruistic parent dislikes the outcomes of the child being forced to liquidate the house or facing low consumption, this strategic behavior strengthens the parent's transfer motive.
• Preference for Illiquidity: This mechanism leads to the surprising result that 22% of young households prefer illiquid housing over liquid housing. These households, who tend to have parents approximately three times wealthier than those who do not prefer illiquidity, are more likely to receive larger transfers. This generation of a preference for illiquidity is a novel theoretical mechanism driven by parental wealth.
• Age Profile: This preference for illiquidity declines with age, consistent with a reduction in reliance on parental transfers as the child ages.

2. Effects on Wealth Accumulation and Portfolio Choices

Parental transfers significantly alter the financial decisions and portfolio composition of young households:

• Crowding Out Savings: Anticipated transfers cause children to reduce their own saving. The model confirms that altruism reduces saving, as children save less when their parent is richer, and they are more likely to switch from saving to borrowing sooner.
• Willingness to Take Risks: Households with wealthier parents are willing to buy sooner, take on higher leverage, and hold less liquid precautionary savings. This occurs because future transfers provide partial insurance against future income shocks, mitigating the risks associated with the large illiquid investment of homeownership.
• Liquidity Constraints: Altruism encourages households to choose to be liquidity constrained (often called "hand-to-mouth"), becoming homeowners with less wealth and closer to borrowing limits. Parental transfers reduce the downside of these liquidity constraints by providing insurance.

3. Economic Implications for Consumption (MPCs)

The presence of altruistic transfers has quantified effects on marginal propensities to consume (MPCs), a critical measure of household responsiveness to economic shocks:

• Lowering Average MPCs: The introduction of altruistic transfers lowers average MPCs by about 20% (from 0.32 to 0.26). This suggests that standard life-cycle models that omit intra-family transfers may overstate the discrepancy between structural models and empirically observed high MPCs.
• Impact on Liquidity-Constrained Households: Altruism significantly reduces the MPCs of liquidity-constrained households (from 0.43 to 0.32), primarily because current transfers provide partial insurance against shocks. Ignoring parental transfers overstates the MPCs of "wealthy hand-to-mouth" households (those with positive net worth but little liquid wealth) by about 30%.
• Observational Similarity: Behavior associated with high MPCs due to preferences like impatience is observationally similar to the behavior of households expecting altruistic support.

4. Downsizing and Risk Mitigation Behavior

The empirical evidence from the PSID confirms the behavioral effect of parental wealth as insurance during income shocks:

• Retention of Homeownership: Parental resources help households maintain homeownership and mitigate the drawbacks of illiquidity.
• Downsizing Avoidance: Households with less wealthy parents tend to downsize their housing (housing consumption falls by about 5%) during unemployment spells, but those with wealthy parents retain their current homes and do not significantly decrease housing consumption. This indicates that homeowners with wealthy parents find the illiquidity of homeownership less problematic because of the insurance mechanism provided by expected future transfers.
• Mortgage Delinquency: Households with wealthier parents are empirically less likely to fall behind on mortgage payments, further supporting the view that parental resources act as insurance against income shocks.

The sources quantify the impact of the "Bank of Mom and Dad" by relying on a sophisticated structural life-cycle overlapping generations (OLG) model that incorporates altruistic interactions and the illiquid nature of homeownership. This methodology allows for the quantification of aggregate effects and the exploration of policy counterfactuals that would be difficult to establish empirically.

Core Model Structure and Components

The model is built by combining two distinct modeling traditions: housing models (which often ignore parental transfers) and models of parental transfers (which often ignore housing).

1. Life-Cycle Overlapping Generations (OLG): The model features discrete, finite time, tracking households who enter at age 25 and die at age 83. A family dynasty consists of an adult child (ages 25 to 53) and a parent (ages 55 to 83), with a 30-year age gap and 30 years of overlap.
2. Altruism without Commitment: Parents and children are altruistic, meaning the parent's utility depends on the child's utility, measured by the intensity parameter $\eta$. They interact without commitment through inter-vivos transfers ($t_p$) and end-of-life bequests. The lack of commitment is crucial because it aligns with empirical transfer patterns and generates strategic behavior, allowing transfers to flow to borrowing-constrained children with high marginal utility of wealth.
3. Illiquid Homeownership: Housing is the second critical component, incorporating a frictional housing market. Households face a rent-or-own decision. Illiquidity is captured by proportional adjustment and moving costs on owner-occupied housing, including selling costs ($m_s$) and purchase costs ($m_b$). The housing block is intentionally simple, featuring constant prices and only one size available for each tenure choice for tractability, but it captures key barriers like down payment constraints and illiquidity.
4. Financial and Income Components: Households can save or borrow using one-period bonds. Borrowing (mortgages) is subject to a loan-to-value (LTV) constraint, and households exceeding an LTV threshold must pay a private mortgage insurance (PMI) premium. Children face persistent idiosyncratic age-dependent productivity shocks, while parents (aged 55 and up) face no income uncertainty in the benchmark model, though robustness checks confirm the results hold even with parental income risk.

Mechanisms Captured by the Model

The structural model is designed to explicitly capture how transfers mitigate the risks associated with homeownership.

• Alleviating Credit Constraints: Transfers can directly help children meet down-payment requirements and alleviate LTV constraints.
• Mitigating Illiquidity Drawbacks: The prospect of future transfers provides partial insurance against income shocks, reducing the risk of costly liquidation (distressed sales) that comes with illiquid homeownership. This feature is essential for the model to rationalize the empirical pattern that households with wealthy parents do not downsize during income losses.
• Strategic Commitment Device: The illiquidity of housing, specifically the sales costs, is modeled as a commitment device that children of wealthy parents can strategically use to encourage future transfers.

Data and Estimation Methodology

The model parameters are selected through a two-step process:

1. External Calibration (First Stage): Parameters independent of the model structure (e.g., risk aversion ($\gamma=2.0$), discount factor ($\beta=0.92$), interest rates, LTV limits, and sales/purchase costs) are either taken from existing literature or calculated directly from the data, primarily the PSID. For instance, the Panel Study of Income Dynamics (PSID) is the main data source because it tracks wealth, income, and housing data for both parents and adult children over time, crucially including inter-vivos transfer information.
2. Structural Estimation (Second Stage): The remaining three parameters—the altruism parameter ($\eta$), the owner-occupied utility premium ($\chi$), and the relative size of owner-occupied housing ($h_o$)—are estimated internally using Simulated Method of Moments (SMM). This involves minimizing the distance between four targeted simulated and empirical moments: the homeownership rate, the transfer receipt rate, the rent-to-income ratio, and the wealth at first purchase. The altruism parameter $\eta$ is primarily identified by the transfer receipt rate.

Model Validation and Robustness

The model's validity is demonstrated by its ability to match several nontargeted empirical moments and household-level behavioral patterns observed in the PSID data:

• Matching Empirical Patterns: The model successfully replicates the positive correlation between parental wealth and children's homeownership retention, the age of first ownership, and the fact that households with wealthy parents do not downsize during income shocks ("unemployment").
• Robustness Checks: The main quantitative results (the contribution of transfers to homeownership) remain robust when relaxing the assumption of perfectly elastic housing supply and allowing prices to adjust based on supply elasticities. The findings are also robust to the inclusion of parental income and health expenditure risks.

By using this rigorous structural model, the researchers are able to quantify the counterfactual homeownership rate in the absence of parental transfers, moving beyond merely documenting the empirical association to establishing the overall importance of the transfers.