Home prices rose at unprecedented levels in 2021, up somewhere between 16.9% and 20% from 2020 prices, depending on the statistics you look at. It was even more in some hot spots like Miami, where single-family home prices increased an astounding 25.6%. The point is houses are expensive and inflated, like practically everything else these days, and most analysts predict more housing increases for 2022.
Possible 2022 price increases
The predictions for 2022 housing price increases that I've seen range between 5% and 14% (or more in some markets). The exact increase remains to be seen, but house prices will likely continue to rise, at least for the near future. The competition for single-family homes is the greatest in the entry or first-time-buyer market, with cash buyers usually winning the bidding wars that typically occur. How are young people supposed to be homeowners in this environment?
A deal for your kids
Here's an idea I came up with for empty-nester parents who might want to downsize or retire to their dream locale. You could sell your current house to your child at a pre-pandemic price -- with the understanding, formalized in writing, that they will pay you the difference between that price and today's market price. Let's break this down.
Note that you'd need to hire a real estate agent and a certified public accountant to ensure this deal makes sense for you; these transactions have real estate and tax implications that are best handled by professionals. For example, this would be a non-arm's length transaction since both parties know each other, meaning it's not the usual way of conducting a real estate deal. Most common are arm's length transactions, where the seller and buyer don't know each other. Non-arm's length transactions "may be subject to a heightened scrutiny and trigger a tax event for either party," according to HomeLight. And for tax reasons, you want to ensure the price difference is formalized as a loan and not a gift.
1. Your child is ready to buy but is priced out of today's market or keeps losing out to competition -- often from cash buyers. They have money saved for a down payment and can get a conventional loan.
2. You sell to them at a discount. For example, let's say you bought your current home in 2014 and paid $275,000, the median price for 2014's first quarter. You sell the house to your child for around $313,000 (2018's first quarter median price).
3. Find out the price of comparable homes. If the house is in comparable shape to neighboring homes and you can likely get market price, keeping the example above, you could get about $408,000 if you sold the house on the open market (the fourth-quarter median house price of 2021 -- we don't yet have 2022 figures). The difference between what you sell for and what you could get on the open market is $95,000.
4. Your child lives in the house until it appreciates. Let's say in 2024, the house is worth $450,000. Your child could sell the house at that time. They will have made enough money to pay you the $95,000 you missed out on in 2022. (Or you could even charge interest on what was essentially a $95,000 loan. No need to loan shark here, but you could at least make 2% or 3% on the deal.) Your child would make around $40,000 -- possibly more or possibly less.
5. Use the profit for a down payment. Now they can buy a house that better suits their needs. Or if they want to stay, they could take out a home equity loan or a home equity line of credit (HELOC) to pay you back. Either way, this method provides a path to homeownership for young people.
Investing in real estate and owning tangible property is one of the best ways to gain and grow wealth, but it's getting harder for everyday Americans to buy and own real estate these days. Helping young people buy property helps ensure America remains a nation of mostly homeowners rather than becoming a nation of renters.