Recently my daughter, who lives in a very expensive area of the country, was bemoaning the fact that with two growing children, two dogs and one cat, they really needed a bigger house. Unfortunately, everyone they looked at was over their budget. So she asked if there was a way for her father and I to come and live with them and help with the payments. “No way” I said thinking of all the entanglements that situation carried with it. But after thinking about it for a while, I started to investigate the idea and found that multigenerational living is happening more and more frequently these days. While the primary reason may be economic, there are a number of drivers and benefits that are increasing the probability that many households may become multigenerational before too long.
So what is a multigenerational household?
According to the Pew Research Center, a multigenerational household is a household that includes at least two (2) adult generations or two non-sequential generations. For example, it can be parents and adult children or parents and grandparent(s). A non-sequential multigenerational household is adult children and their grandparents living in the same household. Adult children are those age 25 to 34.
Living arrangements can range from simply having an aging parent occupying a bedroom in the home and sharing all other daily activities with the other household members, to the home having an entirely separate living unit with living, kitchen, bedroom and bath along with a separate entrance. Some even have their own separate garage space.
The frequency of multigenerational housing
PEW Research Center also investigated this aspect of the trend and found that in 2012 there were 57 million or18.1% of the population living in multigenerational housing. While many may assume that this is primarily older adults caring for aging parents, the reality is that 23.6% of the 25 to 34 age group are included; the largest percentage of multigenerational housing. The second highest percentage were those age 85 and greater which comprised 22.7% of the population. However, over the past 30 years, the percentages increased across all age groups, with the exception of the 85+, which remained rather stable.
The distributions across gender found that of the 25-34 age group the largest percentage were males which represented 26% of the population. Females on the other hand made up 21%. There were also distinct groupings by race and ethnicity. With the large immigration experienced in the country over the past 30 years, the number of immigrant households comprised of multiple generations has increased significantly. At the time of the study 37% of the U.S. population were minorities. Distribution of multigenerational minorities indicated that 25% of these households were Hispanic, 27% were Asian and 14% were non-Hispanic whites.
Looking at this from a slightly different viewpoint, AARP conducted a study of multigenerational households and found that 9.4% of Asian, 9.5% of African American households, and 10.3% of Latino households were multigenerational. This trend is expected to increase as continued immigration is expected in the coming years. Projections by the U.S. government Census Bureau show that non-Hispanic whites will no longer be the majority by 2043 and the 65+ population will more than double to 92 million by 2060. All this portends an increasing number of multigenerational household formations.
Why Multigenerational Living
A study by the National Association of Realtors looked at the reasons families were living together in multigenerational households. They found that although the reasons were similar among all groups, the percentage did vary based on age. The chart provided below gives an overview of the various reasons for this type of household formation by age.
A survey of multigenerational household dwellers conducted by Generations United in 2011, found that 82% said the set-up brought them closer as a family and that they enjoyed the living arrangement. In addition, 72% indicated that they found that their finances improved while 75% saw an improvement in overall care benefits. An AARP report in April of that same year found that of the 24-35 years olds that had moved in with parents more than half were satisfied with the arrangement. In fact, John Graham, emeritus professor of marketing and international business at the University of California, Irvine summed the move toward multigenerational living this way, “…what’s really happening is the realization that the best way to get along in life is interdependence with the extended family. We’ve had a 50-year experiment with the notion of the nuclear family and it is sort of a stupid way to live.”
What does this mean to the housing market?
Because this trend toward multi-generations living together as one household is growing, builders are beginning to respond. While some are building larger homes with more bedrooms and baths or two separate master suites, builders like Lennar have designed and built homes specifically for multigenerational living. These are homes with separate living sections for the additional generation of family members and are becoming more popular since they offer separate entrances and living areas where each family unit can have their own space. Standard Pacific Homes in California is also building homes to accommodate three generations. These homes typically include a two-story design that have a lock-out rental unit which can accommodate a separate generation of the family or can eventually become a small rental unit. There is a two-car garage for the family and a separate one for the smaller unit which also has a private yard. Needless to say with the growing immigrant and aging baby-boom population this type of housing will have more appeal to home buyers.
What about financing?
Multigenerational housing is becoming more popular and the trend is focused on separate and independent living arrangements, yet buying the home is still expensive. These homes are typically larger than a standard single family home and in most cases, the price reflects that additional square footage. This means that financing is more important than ever.
To address this emerging trend, Fannie Mae has included in their HomeReady program the extended-household income flexibility option. While not a separate program, it does allow a potential borrower to include the income from the various multigenerational family members as a compensating factor if the DTI including just the primary family exceeds 45%. Since these extended households are more common among underserved populations such as low to moderate, minority and immigrant populations, this offers a way for these families to purchase a home in a way that is affordable and allows them to retain the consistent with their lifestyle.
Of course, this financing approach may not be acceptable to all potential buyers. For one thing this type of financing would not lend itself to allowing both generations to be listed as owners of the property. For older individuals who are accustomed to being homeowners and want to continue to enjoy the associated tax benefits, this may be a problem.
There are of course other options. Combining incomes from all borrowers would allow larger loans to be approved as this additional income would support a lower DTI. There are complications to this approach as well. For one thing all members of the household contributing income would have to be on the note and mortgage. This could prove complicated in the case where one of these generations wants to or has to move. Since the borrowers were approved with a combined application, it is unlikely that the remaining family would have sufficient income to bear the monthly payment. In such cases, the extra living unit could easily become a rental, generating income needed for making the payments. But will this be acceptable to investors or regulators?
Other issues that may arise and need to be addressed is what happens if the generation that is buying the property decide to divorce or if one should pass away. What will happen to the older generation living in the separate unit? To address these issues both generations may wish to place the property in a trust or hold title some other way. Once again this changing title structure may cause problems and concerns for investors.
What about servicing these loans?
Will servicing these loans become another issue for servicers to address? How will servicers address the receipt of a payment when it comes from another member of the household? Will it be treated as if the borrower sent it in or will it be rejected because it is not received from the primary borrower? In addition, there is always the possibility of increased defaults since it is likely that when one of the individuals passes away a resulting reduction in income will impact the ability to meet the debt. Will servicers need to develop new loss mitigation strategies to address these issues? Furthermore, in this era of protecting the consumer will servicers be pressured to change their default management for these situations? And what about REO issues. If the servicer is forced to foreclose on one of these properties will there be sufficient buyers interested in this type of housing?
Living in a multigenerational household
While all of these issues are of interest and concern to both lenders and borrowers, the reality is that most people moving into these households are used to living independently and with this change of residence comes other issues that can derail the best of intentions. Having a multigenerational household that has problems living with each other or failing to set realistic expectations can dissolve the benefits of this living arrangement. Ultimately a separation of family members can have an impact on the viability of these loans. So what should potential borrowers consider before agreeing to become a multigenerational family. Both the AARP and an article by Marcie Geffner for Bankrate.com have some suggestions.
1.) Discuss expectations and responsibilities before making the move. Decide who is going to pay what bills, which areas of the home are communal and which are private. If there are areas, such as laundry that are used jointly, decide on when each generation will have use of it. If you are buying a home with a separate apartment, discuss whether or not the utilities will be joint or separate. This may also be impacted by zoning restrictions so check them out as well.
2.) Older parents with multiple children should discuss the situation with them and with all families together. This will avoid hard feelings of some kids getting “stuck” with all the responsibility and others feeling that one of the siblings is getting an advantage in a potential inheritance situation. In other words, be careful when mixing assets and families.
3.) When determining where you will live make sure that the home accommodates physical issues such as grab bars, brighter lightening and other items that are or may become necessitates as individuals age.
4.) Bring patience and acceptance from all parties. People’s personalities and habits are unlikely to change. Every member of the family must be willing to accept them.
Time magazine for the week of February 22nd has an extended article focused entirely on the frontiers of longevity and the creation of an American culture that supports it. There is no doubt that the upward trend we are seeing in multigenerational housing is just the tip of the iceberg and this move to multigenerational housing is one solution that home builders, buyers and mortgage lenders should welcome with open arms.
About The Author
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.