Over the past two years, Americans who own their homes have earned more than $6 trillion in housing wealth. To be clear, this doesn’t mean that homebuilders have converted $6 trillion worth of new home buyers, or that existing homeowners made $6 trillion in kitchen and bathroom upgrades.
Instead, most of that money has been generated by the fact that housing, in short supply and high demand across America, has risen at a record pace during the pandemic. Millions of people – widely spread among the 65 per cent of American households who own their homes – have taken a share of these windfall profits.
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. For them, rents are rising rapidly. Inflation reduces their income. And the thing that created all this wealth has pushed home ownership as a way to build wealth out of reach.
This double reality follows what was considered a collective fortune-making event with few precedents in American history.
“I’m really struggling to come up with a comparison with this,” said Benjamin Keys, a professor at the Wharton School of Business, trying to pinpoint the moment so many people have acquired such a large fortune in such a short time.
In percentage terms, the stock market has risen more during the pandemic, but fewer Americans have benefited from it. During the recent housing boom, the increase in home values was similarly staggering but was limited to smaller parts of the country. Those stocks have largely faded in the kind of crash that economists say is unlikely to happen this time around. Mr. Keys suggested that perhaps a better analogy would be the land rush in the Oklahoma Territory of 1889, or the Los Angeles oil boom of the 1920s, events that suddenly changed who owned the land and how much it was worth.
The $6 trillion, estimated by the Federal Reserve, does not account for all equity in rental properties. So he underestimates the fortunes that have been accumulating in the housing market recently.
Hard-to-predict events, such as a painful recession, can still reclaim some of that total. And this wealth is different from having money parked in a bank account, of course. To use it, families must sell a home or utilize its value through an instrument such as a home purchase loan, which is not risk-free. But the evidence shows that homeowners are exercising their home ownership rights in real ways — to send their kids to college, start businesses, invest more in housing, and build more wealth.
“There is a rosy picture and one that is not so rosy,” said Emily Wemmers, an economist at Syracuse University who has studied how families use their home equity to pay for higher education. “The other aspect is very concerning. There is this group of children whose parents do not own a home and so have not seen this increase in wealth, and also their parents may have seen a decrease in income.”
Understand inflation in the United States
The cumulative effects are sweeping and disparate: This period of rising equality will enable some families to create intergenerational wealth for the first time. It would force other families to delay home ownership for years.
This will amplify inequality, with the gains going disproportionately to baby boomers (at the expense of millennials who will buy their homes someday), and white households, which have a home ownership rate 30 percentage points higher than black households. But black families who own a home will especially benefit because the wealth of a black family overwhelmingly comes in the form of housing.
“I don’t think there is a viable alternative to home ownership at this time” in terms of wealth building, said Sy Richardson, senior vice president of programs at the National Urban League, which promotes home ownership among black families. “It’s an economic disaster for black families who are unable to own homes.”
High-income households, which own the most expensive homes, saw the largest overall gains. But because home ownership is so widespread in America, the poorest fifth of families have also added about $600 million in home equity in the past two years. In percentage terms, they have experienced the largest increase in wealth.
Homeowners who remember the 2008 housing crisis may be nervous about all this. This is an entirely different housing market, said Mark Zandi, chief economist at Moody’s.
The bubble was defined in the early 2000s by risky lending and overbuilding. Today, homebuyers are in a more stable ground thanks to credit scores, traditional mortgages, and pandemic savings. Today there is also a nationwide housing shortage. This has run into rising demand from historically low mortgage rates, from families looking for more space during the pandemic, and from remote workers who can move to more affordable places. As a result, home values have skyrocketed almost everywhere (making many of those affordable places unaffordable anymore).
Price growth is likely to slow now that interest rates have risen quickly, but economists generally do not expect prices to fall. There is very little demand for very little housing in America today. Higher prices will make access to equity more expensive. Mr Zandi said these stocks “will largely prove durable”.
Black Knight, a company that tracks the mortgage market, estimates that the average homeowner with a mortgage has earned $67,000 in “equity” in the past two years. This is the actual cash that families have access to while keeping 20 percent of the equity in their homes as lenders often demand.
By this measure, the average mortgage holder in the San Jose, California metro area earned $230,000 in two years. In Boise, Idaho, it is worth 114,000 dollars. In Cleveland, it’s $27,000.
“For large segments of American households, that’s great,” said Michael Lowenheim, an economist at Cornell. “It’s not just for the wealthy, and it’s not just for those who live in the big cities. It’s happening in Ithaca as well.”
What is inflation? Inflation is the loss of purchasing power over time, which means your dollar won’t go as far as it did today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation, and toys.
Mr. Lowenheim found that families who experienced a rise in home prices when 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 major public universities than community colleges.
He and his colleagues also found that families with higher home values were more likely to have children. Work by other researchers has shown that they are more likely to start new businesses, too.
“Is this fortune real?” Mr. Lovenheim said. “People act like they’re real.”
The first home that Julio Felison II was able to buy in 2019 in Springfield, Virginia, tangibly changed his life. He and his wife had their first child in that house. They were then able to purchase a larger single-family home in December, keeping the first home as a rental property.
Had they not bought in 2019 — before home prices today, and rent inflation today — he knows exactly how different his life would be: He said not buying a house, he would have meant not having a son.
“I wouldn’t have felt so comfortable having a baby when we were commuting and renting,” said Mr. Felison, a 35-year-old technical sergeant. “Rent is an unknown variable – it’s at the mercy of someone else, from the market.”
Now he imagines that his 18-month-old can live as an adult one day in one of these homes.
Similar stories are increasingly elusive for other families who come to First Home Alliance, the nonprofit housing advice organization based in Northern Virginia that has helped Mr. Felison. Today, a family earning $70,000 a year can’t compete for a three-bedroom apartment in the area.
“Some of them have to wait,” said Larry Luz Sr., president of First Home Alliance (a nonprofit he started with his housing fortune). “We can educate them about the process, make them fully affordable. But they can’t buy in this area.”
Instead, they will wait for their income to rise, or for housing prices to calm down, or for the level of new home construction to rise.
But going forward, Mr. Keys, the Wharton professor, worries that all this housing wealth will only enhance the fundamentally problematic aspects of the American housing market: that families feel they have few alternatives to build wealth, and that housing should serve as a shelter for both. As financial assets, homeowners are motivated as a result to protect those assets.
“There is something kind of malicious about it,” he said. In a sense, millions of people have made trillions of dollars in the past two years by doing nothing.
“But it is worse than that,” he added. “It is not that they are not doing anything; it is that they have aggressively halted development in many places.”
He said that this wealth was created precisely because it is very difficult to build housing in America. This can make the issue of building more of them more difficult.