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Homeownership, Financial Flexibility, and Wealth
Homeownership, Financial Flexibility, and Wealth
Housing Policy, July 8, 2005
by Natalia Siniavskaia, Ph.D.
Housing, as a unique consumption good, delivers not only a stream of housing services and associated social benefits but also provides a mechanism for households to save and accumulate wealth. This latter benefit of homeownership became particularly apparent during the recent years of house price appreciation. This article presents some of the most recent academic research findings focused on homeownership effects on wealth accumulation and savings.
Housing and Accumulation of Wealth
Homeownership provides multiple opportunities for households to save and accumulate wealth. Before buying a house, households increase savings to accumulate a down payment. Once they become home owners they are ‘forced’ to save through amortization of their mortgages. As homeowners repay their mortgages, their debt burden declines while housing equity and overall wealth rise. Some home owners further boost their savings as they plan for maintenance and upgrading projects. Finally, housing appreciation offers another means for wealth accumulation by delivering tax-exempt capital gains when house prices increase. Of course, as with any other asset, house prices are not guaranteed to go up all the time, but historically national home price measures did and on average rose faster than inflation.
The 1998 - 2001 Survey of Consumer Finance (SCF) – the premier source of household wealth data from the Federal Reserve Board – shows that, even during the stock market boom years, housing remained the major source of wealth for most US households. Figure 1 exhibits this “democratic” nature of housing equity and shows that across all net worth groups, housing equity is a more commonly held asset than stocks.
The SCF further shows that in 2001, among households with both housing equity and stocks, 66 percent had more wealth in housing than in stocks. The numbers reported by the Joint Center for Housing Studies [JCHS] also show that home equity is more evenly distributed than stock wealth. According to their estimates, the top one percent of stockholders own 33.5 percent of total stock wealth, while the top one percent of home equity holders own just 13 percent of total home equity. The relative stability of home equity became apparent during the stock market decline in 2001-2002 when households lost more than a trillion dollars in stock value while their housing equity continued to climb.
Wealth Accumulation across Income and Racial Groups
An argument arises, however, about whether homeownership is a good or bad strategy for accumulating wealth for low-income households, and whether other assets might work better for these families. A new report commissioned by the US Department of Housing and Urban Development (HUD), “Wealth Accumulation and Ownership: Evidence for Low-Income Households” (2004), analyzes the importance of housing and non-housing sources of wealth accumulation across income and racial groups. The authors create a unique data set by merging the Panel Study of Income Dynamics (PSID) data with the Census tract level data. This data set provides detailed information on the net wealth position and house appreciation for almost 5,000 households tracked over nine years, from 1984 to 1992, and allows researchers to compare housing and non-housing wealth accumulation across income and racial groups. In addition, the data allow researchers to observe multiple changes in the ownership status of the families (renting to first home owned, first home to trade-up, owning to renting, etc.) that are essential in modeling and estimating housing wealth accumulation.
The results are briefly summarized in Table 1 and illustrate major differences between cohorts in their ability to accumulate wealth, including the relative difficulty experienced by low-income and minority households in building non-housing wealth over time. Many of the results are quite intuitive. For example, higher income households can afford more expensive houses, so appreciation accumulates on a larger base. Consequently, housing price appreciation creates higher nominal equity gains of $4,460 for high income white households, but only $1,712 for low income minority households. The amount of “forced” savings also increases with income, since it simply reflects paying off mortgages on more expensive houses.
Housing wealth accumulation also depends on whether households will remain homeowners and ever transition to higher value homes. Researchers find that these “housing hierarchy” dynamics are strikingly different across income and racial groups. Lower income and especially minority families are more likely to “slip” back to renting and never regain owner-occupied housing. Specifically, the report shows that only 37 percent of low-income minority residents that return to renting go back to owning, while for high-income white households, this percentage is around 58 percent. In addition, only 22 percent of low-income minority ever transition to a second home and of those only 14 percent eventually move to a third property. For high-income white families these percentages are higher, 33 percent and 28 percent, correspondingly.
The differences in ability to accumulate non-housing wealth are even more striking. While high-income white households accumulate on average $2,650, high income minority families manage to accumulate only $300, and the median accumulation for low income minority households is $0, meaning that half of these households are not able to save at all and implying that housing wealth is their only wealth.
The results do not prove that homeownership is a guarantee of successful wealth accumulation for all households, since a small percentage lose money on their homes. In general, however, researchers find that homeownership affects household wealth positively and the impact is stronger if households do not return to renting and eventually transition to new, typically higher value, houses.
Overall, these results support the conventional wisdom that homeownership is not for everyone. Households that move frequently may find the transaction costs of searching, buying and selling homes too high, and some low-income households may find owning and maintaining their own house prohibitively expensive. But for those households who can afford to own a house and plan to stay put for a while, homeownership presents a stable source of wealth and for some low-income households the only source.
Table 1. Median Annual Accumulation of Wealth by Income and Racial Group (1984-1992)
Non-Housing Wealth Accumulation
Housing Wealth Appreciation
(after 9 years)
High Income, White
High Income, Minority
Low Income, White
Low Income, Minority
Source: US Department of Housing and Urban Administration, 2004.
Housing Wealth and Financial Flexibility
In recent years, rapidly appreciating house prices not only gave a boost to households’ assets but also provided them with an easier access to relatively low-cost credit to finance consumer expenditures: education, home renovation, purchase of durable goods, etc. Home-equity lines of credit, refinancing, reverse mortgages, and other innovative financial products offered multiple ways for homeowners to substitute mortgage debt for higher-cost consumer loans, and for many borrowers using their house as collateral was the only way of obtaining cheaper credit. At the time when the economy was losing jobs, the stock market was largely in the red, and low interest rates limited the income available from bonds, housing wealth provided a financial cushion to households, allowing them to sustain consumption spending during the years of unstable income. Clearly, the downside of having easier access to credit and more financial flexibility is that it increases household debt. Ideally, it will be easier to repay this lower-cost debt during better economic times, but some households may find themselves with excessive amount of debt, more vulnerable to potentially rising interest rates and facing higher default risk.
Another new report commissioned by HUD, “The Impact of House Price Appreciation on Portfolio Composition and Savings” (2005), investigates to what extent households use their housing equity gains to finance consumption spending. The report draws on two reputable sources of household level data: the above-mentioned SCF and the National Longitudinal Survey of Youth (NLSY). The SCF is known to provide the most complete information on household wealth but tends to over-sample high-income and high-wealth households. The NLSY, therefore, is a good complementary source of data, since it is known to over-sample younger, lower-income and minority households.
The report analyzes more than 20 years of data from both surveys, covering the period 1983 to 2001 from the SCF, and 1979 to 2000 from the NLSY. When the demographic and social differences between the two data sets are accounted for, they both provide consistent results. Higher-income households (that is with income exceeding $50,000 in year 2001 dollars) tend to spend between 8 and 17 cents out of each dollar of their house appreciation, and most of this spending goes to finance non-durable consumption. Low- and moderate- income households (with incomes below $25,000 and between $25,000 and $50,000, correspondingly) spend between 12 and 18 percent of their housing equity gains. Most of this spending is used to finance automobiles and purchases of other durable goods. Thus, homeownership allows low- and moderate- income households to accumulate other assets that deliver services over time while benefiting from the housing services and wealth accumulation provided directly by the home.
Homeownership Wealth Effects and Economic Growth
On the macroeconomic level, the wealth effects related to homeownership contributed significantly to consumption and economic growth in recent years. According to the Joint Center for Housing Studies (JCHS) recent reports [2003-2005], households pumped huge sums of money back into the economy through refinance activities. In 2004 alone, homeowners that did refinance cashed out $139 billion in equity. In 2002 the contribution of cash-out refinances to economic growth eclipsed that of residential construction. In addition, households that refinanced without taking out equity injected more than $13 billion into the economy from their increased cash flow. Finally, homeowners rolled $134.5 billion of higher-cost second mortgages into their new first mortgages, also freeing up additional cash for spending. This trend persisted in 2003 and 2004 when the wealth effects related to home price appreciation, realized capital gains, and home equity borrowing continued to sustain the growth in consumption.
In a nutshell, the ability of homeowners to borrow against housing wealth and to sustain their spending was a major factor in making the economic slowdown of 2001-03 milder and turning it into the current economic recovery.
Boehm, T.P., Schlottmann A., and Abt Associates Inc. Wealth Accumulation and Homeownership: Evidence for Low-Income Households. HUD, Office of Policy Development and Research (2004). Haurin D.R., and Rosenthal S.S. The Impact of House Price Appreciation on Portfolio Composition and Savings. HUD, Office of Policy Development and Research (2005). The State of the Nation’s Housing. Joint Center for Housing Studies of Harvard University. 2003, 2004, 2005.
For more information about this item, please contact Natalia Siniavskaia at 800-368-5242 x8441 or via email at firstname.lastname@example.org.