Homeownership is a unique tool for building wealth in our economy— one that must be made accessible to more people if we hope to increase the financial security of low-income Americans.
I’m finally beginning to see some of the familiar harbingers of spring. Temperatures are rising; the days are starting to get longer. And the real estate industry is revving its engines as a surge of buyers and sellers hit the housing market.
We’re at the start of what’s often called the home-buying season. Creating more homeowners is not only exciting for people in real estate, but also for those of us in the business of social change and economic equality. That’s because homeownership is far and away the most powerful driver of wealth creation in the U.S. economy. And wealth matters, big time.
The Critical Importance of Wealth
Intuitively, most of us know this. But while we can easily envision lifestyle differences between high-earners and people living in poverty, it can be harder to pinpoint the effects of being asset-rich—often because the effects span a lifetime and beyond. Income funds daily expenses, but it’s wealth (or, the difference between someone’s assets—cash savings, a home, a business—and their debts) that offers long-term financial security. It’s protection against crises, unexpected expenses or dips in income, and it can transform the economic prospects of a family, both day-to-day and generation-to-generation.
Imagine a young family that has just enough cash saved up to get a mortgage. As they build equity in their home over the years, they can borrow against that wealth to weather financial emergencies—a car breakdown, a medical crisis, or whatever it may be. By the time their child is ready to go to college, they can afford to send her off—likely adding hundreds of thousands of dollars to her lifetime earnings and launching her into adult life debt-free.
Across the street, another young family can’t quite afford the down payment on a home. For years, they’re stuck paying rent—not building any wealth–while they work to save up. But when they’re hit with a temporary lay-off, it devastates the family’s finances, with no income and no accumulated wealth to dip into to ride out the hard times. When their child heads to college, it’s only possible with a load of student debt—debt that will have to be paid off before that young person can start building their own wealth.
It’s a simplistic example, but you can spin it out for generations. And it highlights some of the patterns that play out family by family, with results that are evident at the macro-scale. A child born into a wealthy family, for example, is six times more likely to become a wealthy adult than a child who grows up poor. Homeownership has long been a central part of this equation. In 2015, the average net worth of a homeowner in was $195,400, compared to just $5,400 for a renter, according to the Federal Reserve. The significance is even more staggering for people of color. Wealth from equity in a home constitutes 51% of total wealth of the average white household, but 71% for black households. Essentially, if you are part of America’s fastest growing populations, it’s highly likely that without a home, you don’t have wealth.
What makes buying a home such a singular wealth-building method in the U.S. economy?
If nothing else, it’s a fairly reliable long-term investment. For decades, home prices have appreciated annually at average rates from about 3% to 5%. While the mortgage payments remain the same, market prices tend to rise, creating valuable home equity that increases a family’s net worth.
It is enhanced by leverage.
The unique power of this investment, though, is that it appreciates based on the entire value of the home. Equity accumulates on not only what you’re able to pay, but also what you borrow. That means that rather than earning 4% appreciation on the $10,000 down payment you fronted—or $400—you build equity on the full $100,000 value of the house—$4,000—as if you had invested all of that money yourself. You leveraged your $10,000 into a $100,000 investment.
It is forced savings.
Lastly, paying off the balance of a mortgage month by month is a forced savings mechanism that builds equity at the same time. And when the mortgage is up, you have something to show for it: ownership of a house that you can sell.
For those of us concerned with tackling disparities, this season is a chance to reflect on the power of homeownership as a tool for advancing the economic security of more Americans. The challenge we face is opening that pathway to more families, especially those Americans long locked out of this wealth-building opportunity.
This blog was originally published on April 11, 2017 as “Homeownership as a Key Driver of Wealth.”