In the last two years, Americans who own their homes have gained more than $6 trillion in real estate wealth. To be clear, that doesn’t mean that homebuilders have passed on $6 billion in new homes to buyers, or that existing homeowners have made $6 billion in kitchen and bathroom upgrades.
Rather, most of this money has been created by the simple fact that housing, in short supply and high demand across the United States, has appreciated at a record pace during the pandemic. Millions of people, widely distributed among the 65 percent of American households that own their own home, have earned a share of this windfall.
It’s a remarkably positive story for Americans who own a home; it is also inseparable from the housing affordability crisis for those who do not have it. For them, rents are rising rapidly. Inflation is killing your income. And the very thing that has created all this wealth has pushed home ownership as a means of wealth creation even further out of reach.
That dual reality follows what has been a massive wealth creation event with few precedents in US history.
“I’m really having a hard time finding a parallel to this,” said Benjamin Keys, a professor at the Wharton School of Business, trying to pinpoint a time when so many people gained so much wealth in such a short amount of time.
In percentage terms, the stock market has risen more during the pandemic, but fewer Americans have benefited from it. During the last housing boom, the increase in home values was similarly dizzying, but it was limited to a few parts of the country. And that equity has largely vanished in the kind of bankruptcy that economists say is much less likely to happen this time. Perhaps a better analogy, Keys suggested, would be the Oklahoma Territory land rush of 1889, or the Los Angeles oil boom of the 1920s, events that abruptly changed who owned land and how much it was worth.
The $6 trillion sum, estimated by the Federal Reserve, does not count all equity in rental properties. So that’s an understatement of the riches amassed in the real estate market lately.
Hard-to-predict events like a painful recession could still claw back some of this total, of course. Property taxes can go up. And that wealth is not the same as having money parked in a bank account. To use it, households must sell a home or tap into its value through a tool like a home equity loan, and that’s not without risk. But the evidence shows that homeowners exercise home equity in real ways: to send their kids to college, start businesses, invest more in housing, and build even more wealth.
“There’s a rosy picture and a not-so-rosy picture,” said Emily Wiemers, an economist at Syracuse University who has studied how families leverage their home equity to pay for higher education. “The other side is quite worrying. There is this group of kids whose parents don’t own a home and therefore didn’t see this increase in wealth, and also whose parents may have seen decreases in income.”
Understanding inflation in the US
The cumulative effects appear to be broad and divergent: this period of rising equity will allow some families to build intergenerational wealth for the first time. It will force other families to delay home ownership for years.
It will amplify inequality, as the gains will go disproportionately to baby boomers (at the expense of millennials who will one day buy their homes) and to white households, who have a homeownership rate 30 percentage points higher than white households. blacks. But black home-owning families will benefit in particular because the wealth of black households is overwhelmingly in the form of housing.
“I don’t think there’s a viable alternative to homeownership right now” in terms of wealth creation, said Cy Richardson, senior vice president of programs for the National Urban League, which promotes homeownership among black families. “And it’s an economic disaster for black families who can’t own a home.”
The highest-income households, which own the most expensive homes, have seen the biggest total gains. But because homeownership is so widespread in America, the poorest fifth of households have also added billions in home equity in the past two years. In percentage terms, they have seen the largest increases in wealth.
Homeowners who remember the housing crash of 2008 may feel nervous about it all. But this is a very different housing market, said Mark Zandi, Moody’s chief economist.
The bubble of the early 2000s was defined by risky lending and overbuilding. Homebuyers today are on much stronger ground with their credit scores, conventional mortgages, and pandemic savings. Today there is also a housing shortage throughout the country. And that has collided with growing demand from historically low mortgage rates, from families looking for more space during the pandemic, and from remote workers who could relocate to more affordable places. As a result, home values have gone up almost everywhere (making many of those affordable places no longer so affordable).
Price growth is likely to slow now that interest rates are rising rapidly, but economists generally don’t expect prices to decline. Today, there is too much demand for too little housing in the United States. Rising rates will make it more expensive to access equity. But this fairness, Zandi said, “will largely be long-lasting.”
Black Knight, a company that tracks the mortgage market, estimates that the average homeowner with a mortgage has earned $67,000 in “available value” in the past two years. That’s the actual cash that households can access while keeping 20 percent of their homes’ equity, as lenders often require.
By that measure, the average mortgage holder in the San Jose, California, metro area has earned $230,000 in two years. In Boise, Idaho, it’s $114,000. In Cleveland, it’s $27,000.
“For a large portion 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 also happening in Ithaca.”
Mr. Lovenheim found that families who experienced higher home price growth while their children were in high school were more likely to send their children to college. And kids who went to college were more likely to attend flagship public universities than community colleges.
He and his colleagues also found that households with rising home values were more likely to have children. The work of other researchers has shown that they are also more likely to start new businesses.
“Is this wealth real?” Mr. Lovenheim said. “People act like it’s real.”
The first house that Julio Velezon II was able to buy in 2019 in Springfield, Virginia, has significantly changed his life. He and his wife had their first child in that row house. They were then able to purchase a larger single-family home in December, keeping the first home as a rental property.
If they hadn’t bought in 2019, before today’s home prices and today’s rent inflation, he knows exactly how his life would be different: Not buying a house, he said, would have meant not having a child.
“I wouldn’t have felt comfortable having a child when we were moving and renting,” said Velezon, a 35-year-old Air Force technical sergeant. “Renting is such an unknown variable: you are at the mercy of another person, of the market.”
Now imagine that your 18-month-old son could one day live as an adult in one of these houses.
Similar stories are increasingly out of reach for other families who turn to First Home Alliance, a Northern Virginia-based housing counseling nonprofit that helped Mr. Velezon. Today, a family earning $70,000 a year can’t compete for a three-bedroom apartment in the area.
“Some of them just have to wait,” said Larry Laws Sr., president of the First Home Alliance (a nonprofit organization that started with its own real estate wealth). “We can educate them on the process, get them fully qualified for affordability. But they cannot buy in this area.”
Instead, they will wait for their incomes to rise, or home prices to cool, or new home construction to pick up.
But going forward, Mr. Keys, the Wharton professor, worries that all this housing wealth will only reinforce aspects of the American housing market that are fundamentally problematic: that families feel they have few alternatives to build wealth, that housing must act as both a haven and a financial asset, which owners are motivated as a result to protect that asset.
“There’s actually something that’s a little pernicious about this,” he said. In a sense, millions of people have made trillions of dollars in the last two years doing nothing.
“But it’s worse than that,” he continued. “It’s not that they’re not doing anything; 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 the United States. And that could make it even more difficult to build more.