Over the past two years, Americans who own their homes have received more than $ 6 trillion in housing wealth. To be clear, this does not mean that homebuilders have transferred new homes worth $ 6 trillion to buyers, or that existing homeowners have made $ 6 trillion in kitchen and bathroom upgrades.
Rather, most of this money has been created by the simple fact that housing, scarcity, and high demand across America have been valued at record speeds during the pandemic. Millions of people –[ads1]; widely distributed among the 65 percent of American households that own their homes – have experienced some of this unexpectedly.
It’s a remarkably positive story for Americans who own a home; it is also inseparable from the housing crisis for those who do not. For them, rental prices are rising rapidly. Inflation reduces their income. And it is precisely this that has created all this wealth that has pushed home ownership as a means of wealth building further out of reach.
The dual reality follows what has been an event for mass creation of wealth with few precedents in American history.
“I’m really struggling to come up with a parallel to this,” said Benjamin Keys, a professor at the Wharton School of Business, trying to identify a moment when so many people were getting so much wealth in this small time.
In percentage terms, the stock market has risen more during the pandemic, but fewer Americans have profited from it. During the recent housing boom, the rise in housing values was similarly staggering, but limited to fewer parts of the country. And that equity largely disappeared in the kind of bust that economists say is far less likely to happen this time. Perhaps a better analogy, Mr. Keys suggested, would be the landslide in the Oklahoma Territory in 1889, or the oil boom in Los Angeles from the 1920s, events that abruptly changed who owned land and how much it was worth.
The sum of 6 trillion dollars, estimated by the Federal Reserve, does not count all the equity in rental properties. So there is an underestimation of the riches that are accumulating in the housing market lately.
Difficult to predict events, such as a painful recession, can of course still take back some of this sum. And this wealth is not the same as having money parked in a bank account. To use it, households have to sell a home or tap the value of it through a tool like a mortgage, and it is not risk free. But evidence shows that homeowners use equity in the home in real ways – to send their children to college, to start businesses, to invest further in housing, to build even more wealth.
“It’s a rosy picture and a not-so-rosy picture,” said Emily Wiemers, an economist at Syracuse University who has studied how families use home equity to pay for higher education. – The back is quite disturbing. It is this set of children whose parents do not own a home and therefore did not see this increase in wealth, and also if parents may have seen a decline in income. “
Understand US inflation
The cumulative effects are extensive and divergent: This period of increasing equity will allow some families to create wealth between generations for the first time. It will force other families to postpone home ownership for years.
This will increase inequality, as gains go disproportionately to baby boomers (at the expense of millennials who will one day buy their homes), and to white households, which have a home ownership share that is 30 percentage points higher than that of black households. But black home-owning families will benefit from it especially because the wealth of black households is overwhelming in terms of housing.
“I do not think there is a viable alternative to home ownership at this time” when it comes to building wealth, said Cy Richardson, senior vice president of programs at the National Urban League, which promotes home ownership among black families. “And it’s a financial disaster for black families who are unable to achieve home ownership.”
The households with the highest income, which own the most expensive homes, have seen the largest overall gains. But because home ownership is so prevalent in America, the poorest fifth of households have also added about $ 600 million in home ownership in the last two years. In percentage terms, they have seen the largest increase in wealth.
Homeowners who remember the home bust in 2008 may feel nervous about all of this. But this is a very different housing market, said Mark Zandi, chief economist at Moody’s.
The bubble in the early 2000s was defined by risky lending and superstructure. Today, homebuyers are on much stronger ground with credit scores, conventional mortgages and pandemic savings. Today, there is also a housing shortage on a national basis. And it has collided with sky-high demand from historically low mortgage rates, from families looking for more space during the pandemic, and from external workers who could move to cheaper places. As a result, home values have increased almost everywhere (making many of these affordable places less affordable anymore).
Inflation will most likely slow down now that interest rates are rising rapidly, but economists generally do not expect prices to fall. There is simply too much demand for too little housing in America today. Rising interest rates will make it more expensive to access equity. But this equity, Zandi said, “will prove largely lasting.”
Black Knight, a company that tracks the mortgage market, estimates that the average homeowner with a mortgage has received $ 67,000 in “usable equity” over the past two years. There are actual cash households could access while still retaining 20 percent of the equity in their homes that lenders often require.
With that goal in mind, the average mortgage lender in the San Jose, California metro area has raised $ 230,000 in two years. In Boise, Idaho, it’s $ 114,000. In Cleveland, it’s $ 27,000.
“For large sections of American households, this is great,” said Michael Lovenheim, an economist at Cornell. “And it’s not just for the super rich, and it’s not just for those who live in the big superstar cities. This is happening in Ithaca as well. “
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, which means that your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, clothing, transportation and toys.
Mr. Lovenheim has found that families who experienced higher house price growth while their children were in high school were more likely to send their children to college. And the children who went to college were more likely to go to public flagship universities than community colleges.
He and his colleagues have also found that households with rising housing values were more likely to have children. Work from other researchers has shown that it is more likely that they will also start new businesses.
“Is this wealth real?” in Mr. Lovenheim. “People behave as if they are real.”
The first home Julio Velezon II could buy in 2019 in Springfield, Va., Has measurably changed his life. He and his wife had their first child in that townhouse. Then they could buy a larger detached house in December, and keep the first house as a rental property.
Had they not bought in 2019 – before today’s housing prices, and today’s rental inflation – he knows exactly how his life would have been different: Not buying a home, he said, would have meant not having a son.
“I would not have felt comfortable having a child when we moved and rented,” said Mr. Velezon, a 35-year-old technical sergeant from the Air Force. “Rent is such an unknown variable – it is at the mercy of someone else, by the market.”
Now he imagines that his 18-month-old son could live as an adult one day in one of these homes.
Similar stories are increasingly out of the reach of other families coming to First Home Alliance, a nonprofit organization based in Northern Virginia that helped Mr. Velezon. Today, a family earning $ 70,000 a year cannot compete for a three-bedroom in the area.
“Some of them just have to wait,” said Larry Laws Sr., president of the First Home Alliance (a nonprofit he started with his own housing wealth). “We can teach them about the process, get them fully qualified for affordable prices. But they can not buy in this area.”
Instead, they will wait for their incomes to rise, or for house prices to cool, or for the new residential building to pick up.
But going forward, Mr. Keys, the Wharton professor, worries that all this housing wealth will only reinforce aspects of the U.S. housing market that are fundamentally problematic: that families feel they have few options for building wealth, that housing must function as both shelter and economic asset, that homeowners are motivated as a result of protecting that asset.
“There’s actually something a little harmful about this,” he said. In a way, millions of people have earned trillions of dollars over the last two years by doing nothing.
“But it’s worse than that,” he continued. ‘It’s not that they do nothing; it is that they have aggressively blocked development in so many places. “
This wealth has been created, he said, precisely because it is so difficult to build homes in America. And that can make it harder to build more of it.