Dedicated accounts encourage saving for a down payment

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Homeownership is an important milestone for many in America — they're just having trouble getting there. One of the biggest barriers is saving for a down payment. When you’re paying rent, paying off student debt, and juggling your bills, it’s hard to save.

To incentivize saving, some states are passing laws allowing aspiring homeowners to create first-time buyer down payment savings accounts. The accounts function similarly to 529 college savings plans that let people deposit money earmarked for a specific purpose. Deposits are deductible from taxable state income. States cap how much can be deposited, for how long, and how broadly the money can be used or transferred.

In conjunction with other types of housing assistance available to first-time buyers, such as those listed at downpaymentresource.com, proponents hope these programs will boost sales of new and existing homes, helping many of the industries involved in the home-buying cycle.

Over one-third of U.S. households rent their home. Naturally, reasons vary. They might be new to an area and want to look around before buying. They may prefer not to have the responsibility of homeownership. But research shows that some think they need to put down more than they actually do. And that makes it hard to get started.

A survey by Fannie Mae's Economic & Strategic Research Group found that 40% of consumers said they "don't know" the minimum amount needed for a down payment. On average, those who guessed thought that 12% of the purchase price was required for a down payment. In fact, that is about four times the actual requirement since many loans allow borrowers to put as little as 3% down.

Yet, according to a 2017 survey of renters by Zillow, 66% believe owning a home is essential to the American dream, and 72% believe owning a home increases their standing in the local community. And contrary to the stereotype, more millennials agree with these two statements than any other generation. In addition, millennials are already the largest purchasing block of first-time home buyers.

Yet, that same generation is burdened by student debt, which according to Student Loan Hero, totals $1.4 trillion in 2017. Student loan debt is often cited by potential buyers as the No. 1 one reason they are delaying life choices such as marriage, parenthood, and buying their first home.

To help renters buy their first home, several states — Montana, Virginia, Colorado, Mississippi, Iowa and Minnesota — have created tax-free savings account programs. Each has its own nuances but all have the same goal: encouraging renters to save for a down payment on their first home.

It's still too early to tell how effective these incentives will be in encouraging savings for a down payment but many real estate agents are optimistic. In Mississippi, the National Association of Realtors gathered data to show lawmakers that the new law could encourage 7,000 first-time buyers to enter the housing market statewide over the next five years. Or, put another way, about 1,400 renters each year will take advantage of the tax deduction as they make the move to homeownership. As homeowners, those new residents will spend $1,800 more annually than renters, according to NAR, adding revenue to still-recovering local economies.

At NAR's May 2017 legislative meeting in Washington, D.C., state representatives discussed how to spread the programs to other states. Oregon's legislature is considering a bill. The Oregon Association of Realtors says passing the law would prompt 3,200 renters to become homeowners in the next five years and spark $61 million in construction-related spending.

Pennsylvania will introduce its bill in later in 2017. New York, Oklahoma, Maryland, Utah and Louisiana are also moving to create the accounts, says NAR.

Additionally, congressional representatives from Colorado and New York have introduced two separate bills that, if passed into law, would incentivize saving for a down payment at the national level.

Special-purpose savings accounts are a promising potential solution for helping first-time home buyers — but they are only a partial solution.

We also need more resources to help potential buyers learn how the home buying process really works (and that you don't need 12% down).

We need more financial education resources to not only help families get into homes, but help them stay there for a long time. We need a more modernized mortgage process that is more efficient for lenders and easier for borrowers.

Moving forward across all these areas will help us open doors of opportunity for today's new homeowners, and tomorrow's.

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Down payments First time home buyers Student loan debt Purchase Fannie Mae NAR Montana Virginia Colorado Mississippi Iowa Minnesota Oregon