Home equity, together with retirement savings, accounts for 60% of a household’s net worth according to the U.S. Census Bureau—and the net worth of a typical homeowner is about 40 times the net worth of a renter.
Whilst a tenant is burning money on rent, a homeowner is paying monthly mortgage payments which they essentially get back once they sell their property (minus any interest paid to the lender). The value of a home will also increase over time and can lead to significant long-term gains. Therefore, homeownership can be a significant route to building wealth and increasing your net worth.
Over the last decade, the average medium-income household in the U.S. gained $122,100 in home equity as their home appreciated by 68%, according to the National Association of REALTORS®. Let’s take a closer look at where real opportunities for wealth creation are to be found.
The Price Of A Home
The amount of wealth created typically increases with the price of the home; with the higher the price of the home, the more equity gained. It makes sense, then, that upper-income households (who can afford more expensive homes) had the most opportunity to gain wealth through homeownership.
The median home value for upper-income households grew by $150,800 over the last ten years. With this, upper-income homeowners gained $28,700 more than medium-income homeowners.
Low-income households built a lesser $98,910 in wealth from house price appreciation. However, this represented a whopping 75% increase in home value and, by extension, in homeowners’ net worth.
Location
On a similar note, owners who live in expensive metro areas experienced the largest wealth gains—but this is true regardless of income level. For instance, in the San Jose metro area, low-income owners have built nearly $630,000 in wealth in the last decade; middle-income owners accumulated $643,000, and upper-income owners gained almost $840,000. Whilst upper-income households have accumulated the most wealth, medium and low-income households have still experienced very significant gains.
Lawrence Yun, NAR’s chief economist:
This analysis shows how homeownership is a catalyst for building wealth for people from all walks of life.
All top 10 areas with the largest wealth gains amongst low-income households were in California. However, the homeownership rate for low-income households in these areas is lower than the national level (due to high house prices).
In contrast, metro areas in Florida had significantly high homeownership amongst low-income households. Ocala (FL) had a homeownership rate of 72.9%, and was joined by North Port (66.2%), Port St. Lucie (65.5%), Palm Bay (64.4%), Deltona (63.3%) and Cape Coral (62.9%).
Florida has seen rapid house price appreciation with values increasing by around 80% in some metro areas over the last five years. As a result, a large number of low-income households have managed to accumulate a substantial amount of wealth—over $120,000—in the last decade.
The Number Of Years
Another factor which determines the amount of wealth gained is the number of years in the property. The longer an owner owns a home before selling it, the higher the home equity extraction.
Data shows that low-income households typically own a home for the longest—19 years on average. This compares to 16 years for middle-income households and 14 years for upper-income households.
Through the report, NAR therefore highlights how households of all income levels can build significant wealth through homeownership. Whilst more expensive homes will typically generate higher returns, those that purchase affordable property in the right areas can grow their net worth significantly. This is a strategy which benefits homebuyers and investors alike.
If you’d like to discuss long-term investment opportunities in the U.S. real estate market, get in touch today.
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