Over the past two years, American homeowners have gained more than $6 trillion in real estate wealth. To be clear, this does not mean that homebuilders transferred $6 trillion in new homes to buyers, or that existing owners made $6 trillion in kitchen and bathroom upgrades.
Rather, most of that money was created by the simple fact that housing, in short supply and in high demand across America, appreciated at a record pace during the pandemic. Millions of people – widely distributed among the 65% of American households that own their homes – have won a share of this windfall.
It’s a remarkably positive story for Americans who own a home; it is also inseparable from the crisis of housing affordability for those who do not have it. For them, rents are rising rapidly. Inflation eats into their income. And the very thing that created all this wealth has pushed home ownership as a means of wealth creation even further out of reach.
This dual reality follows what was a mass wealth creation event with few precedents in American history.
“I really struggle to find a parallel to that,” 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 time.
In percentage terms, the stock market has risen more during the pandemic, but fewer Americans have benefited. During the last housing boom, the surge in home values was just as dizzying, but limited to fewer parts of the country. And that fairness has largely disappeared in the kind of meltdown that economists say is much less likely to happen this time around. Perhaps a better analogy, Mr. Keys suggested, would be the Oklahoma Territory land rush of 1889, or the oil boom of the 1920s in Los Angeles, events that abruptly changed who owned land and how much they were worth.
The $6 trillion figure, estimated by the Federal Reserve, does not include all of the equity in rental properties. So that’s an underestimate of the wealth that’s been piling up in the housing market lately.
Hard-to-predict events, such as a painful recession, could of course still claw back some of that total. And that wealth is not the same as having money parked in a bank account. To use it, households must sell a home or leverage its value through a tool like a home equity loan, and it’s not without risk. But evidence shows that homeowners are using their home equity in real ways – to send their kids to college, to start businesses, to invest more in housing, creating 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 tap into their home equity to pay for college. “The other side of the coin is quite troubling. There is this group of children whose parents do not own a house and therefore have not seen this increase in wealth, and also whose parents may have seen their income drop.
Understanding Inflation in the United States
The cumulative effects are expected to be considerable and divergent: this capitalization period will enable certain families to create intergenerational wealth for the first time. This will force other families to put off homeownership for years.
This 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 white households, who have a 30 percentage point higher homeownership rate than black households. . But black homeowning families will benefit in particular because the wealth of black households is overwhelmingly housing.
“I don’t think there’s a viable alternative to homeownership at this point” in terms of building wealth, said Cy Richardson, senior vice president of programs for the National Urban League, which promotes homeownership. homeownership among black families. “And it’s an economic disaster for black families who can’t afford homeownership.”
Households with the highest incomes, who own the most expensive homes, saw the largest total gains. But because home ownership is so prevalent in America, the poorest fifth of households also added about $600 million in home equity over the past two years. In percentage terms, they experienced the largest increases in wealth.
Homeowners who remember the 2008 real estate crisis may feel nervous about the whole thing. But this is a very different housing market, said Mark Zandi, chief economist at Moody’s.
The bubble of the early 2000s was characterized by risky lending and excessive construction. Homebuyers today are on much firmer ground with their credit scores, conventional mortgages and pandemic savings. Today, there is also a housing shortage across the country. And that’s been met with growing demand for historically low mortgage rates, families looking for more space during the pandemic, and remote workers who could move to more affordable places. As a result, home values have gone up almost everywhere (making many of these affordable places less affordable).
Price growth will most likely slow now that interest rates are rising rapidly, but economists generally don’t expect prices to fall. There is simply too much demand for too little housing in America today. Rising rates will make access to capital more expensive. But that fairness, Mr. Zandi said, “will largely prove to be sustainable”.
Black Knight, a company that tracks the mortgage market, estimates that the average mortgage owner has gained $67,000 in “workable equity” over the past two years. It’s real money that households could access while retaining 20% of their home’s equity, as often demanded by lenders.
By this measure, the average mortgage holder in the San Jose, California metro area recouped $230,000 in two years. In Boise, Idaho, it’s $114,000. In Cleveland, it’s $27,000.
“For large swaths of American households, that’s great,” said Cornell economist Michael Lovenheim. “And it’s not just for the super rich, and it’s not just for those who live in big superstar cities. This also happens in Ithaca.
What is Inflation? Inflation is a loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the prices of common goods and services such as food, furniture, clothing, transport and toys.
Mr. Lovenheim 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 kids who went to college were more likely to attend public flagship 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? said Mr. Lovenheim. “People act like it’s real.”
The first house that Julio Velezon II was able to buy in 2019 in Springfield, Virginia significantly changed his life. He and his wife had their first child in this townhouse. Then they were 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 house prices and today’s rent inflation — he knows exactly how his life would be different: Not buying a house, a he said, would have meant not having a son.
“I wouldn’t have felt comfortable having a kid when we were moving and renting,” said Mr. Velezon, a 35-year-old Air Force technical sergeant. “Rental is such an unknown variable – it’s at the mercy of someone else, of the market.”
Now he imagines his 18-month-old son could one day live as an adult in one of these homes.
Similar stories are increasingly out of reach for other families who come to First Home Alliance, a Northern Virginia-based housing counseling nonprofit that has 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 First Home Alliance (a nonprofit he started with his own real estate wealth). “We can educate them on the process, make them fully qualified for an affordable price. But they cannot buy in this area.
Instead, they will wait for their incomes to rise, home prices to fall, or for new home construction to pick up.
But in the future, Mr Keys, the Wharton professor, fears 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 building up a heritage, that housing must serve both as a refuge and a financial asset, that owners are encouraged to protect this asset.
“There’s actually something that’s a little pernicious about it,” he said. In a sense, millions of people have earned trillions of dollars over the past two years doing nothing.
“But it’s worse than that,” he continued. “It’s not that they don’t do anything; it’s that they’ve aggressively blocked development in so many places.
This wealth has been created, he says, precisely because it is so difficult to build housing in America. And that could make the need to build more even more difficult.