 A home is a major source of wealth for most Americans. In a recent National Association of REALTORS® (NAR) survey, three out of four homeowners said they have more wealth in the equity of their homes than they do in their investment portfolio.
A study conducted by the Federal Reserve shows that home equity comprises a larger share of household wealth than any other financial asset, including savings in retirement accounts such as IRAs and 401(k)s. This relationship between house wealth and stock wealth is true for most Americans, with only the wealthiest having greater wealth in their stock investments.
One reason why many American households have a large portion of their wealth in their homes is because home-price appreciation has been steady with little volatility. In fact, home prices have never declined on a year-over-year basis in the 33 years NAR has tracked housing data.
Home prices continued to increase through the Vietnam War, the OPEC oil crisis, several economic recessions, and the Gulf War. While the stock market has seen its ups and downs, home value has continued upward.
Home prices typically increase at the general rate of inflation, plus one to two percentage points, although growth generally is less during periods of recession. Even so, the national average annual increase since record keeping began in 1968 is 6.3%.
What this means for must buyers is that the accumulation of equity in their homes generally will permit them to trade up to larger homes in three to five years. Even in those rare markets that may experience a temporary price correction (following several years of sharp, double-digit price increases), such effects generally smooth out during the typical homeownership period, which is seven years.
In many markets, monthly mortgage payments can be less than rents for comparable property. Even in cases where the mortgage payment is higher, homeowners typically find that their payments will be lower than comparable property rents in only a few years. At the very least, homeownership provides many more benefits than a drawer full of rent receipts.
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In addition, there are significant tax advantages to buying a home. The mortgage interest deduction, along with the ability to deduct property taxes, means real tax savings for most homeowners.
Capital gains from the sale of a previously owned home are a significant source of down payment funds for a majority of repeat buyers whose next home is frequently larger and more expensive. Higher income households have more equity in their home. Households with incomes greater than $75,000 per year typically have a median of $100,000 in home equity. Households with incomes of less than $40,000 typically have a median of $40,000 in equity. Older Americans have more home equity. Households age 50 or older have a median equity of $80,000. Households younger than 40 years old have a median equity of $35,000.
Homeowners tap this gain in several ways. More than half of homeowners use this wealth by obtaining home equity loans or second mortgages. Twenty-two percent of homeowners pull cash out of their home when they refinance their mortgage.
Most repeat homebuyers use capital gains from the sale of a previous home as a source of down payment funds for their latest home purchase. Seventy-six percent of repeat homebuyers used all the capital gains from the sale of a previous home on their current houses. Another 10% of households put some of the gains back into their new homes. Only 15% of repeat homebuyers did not use the realized equity for the down payment on their current homes.
According to NAR, nearly two out of every five repeat homebuyers chose to move specifically to a larger, more expensive (or at least newer) home. By using the realized capital gains from the sale of a previous home to buy a larger one, these homebuyers improve their standard of living and increase their potential for building even greater household wealth.
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