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Homeownership Continues to Drive Wealth

I’ve decided to go back to the Keeping Current Matters (KCM) well again this week. The folks over at KCM do a mini-deep dive into rapidly growing home equity throughout the country. Nationally, there was a 6% increase in equity over the past year which – in real dollars – is about $33,000. In California, that number is closer to $70,000. And no, this really doesn’t appear to be a bubble.

The state of the current housing market is neither healthy nor do I think it is sustainable. I sat in on the California Association of Realtors (CAR) legislative meetings at the beginning of May. One comment that was made during the sessions really stuck with me: California is in danger of becoming a renter state. That means that more people rent in California than own homes.

As the median sales price of a home in California continues to be north of $800,000 it doesn’t appear as though this will change anytime soon. Perhaps the worst part of this housing crisis is that homeownership drives wealth creation faster and in a way that other modes cannot. Ultimately, this means that more and more people – primarily people of color – will continue to get left behind. Lack of generational wealth will become a bigger and bigger issue as California moves away from people being able to buy homes.

As recently as 2019, long-time residents of Vallejo were already concerned about their children being able to buy a home in the city that they grew up in. Fast forward two years later, and the crisis has only deepened; the median home sales price ($530,000) is 20% higher than May, 2019 ($440,000). So far, Federal, State, and Local Governments have both been unwilling and unable to do much of anything to attack the affordability crisis in the country. The much ballyhooed $300 Billion housing affordability plan as part of President Biden’s infrastructure package was DOA in the Senate – and there doesn’t appear to be much appetite to parcel out the legislation into separate bills so it likely won’t come up for a vote in any form. The State hasn’t done much of anything to tackle the affordability crisis and local governments are inept – at best – or a large roadblock – at worst – to any type of systemic change.

I’m currently reading The Color of Law and it is eye opening. What is most disturbing, however, is that many of the policies and practices that Rothstein writes about are still – essentially – in practice today. Things really haven’t changed all that much. There is much to learn and there are many different possible solutions but the biggest hurdle is ourselves – both individually and as political entities and voting blocks. It’s time for us to take a more examined approach and to decide how we want to move forward. I am excited to see so many people building wealth because it is largely a good thing. What I am scared of, is that we will continue to see a widening gap between the haves and have-nots which is – if nothing else – immoral.

Here are the folks over at KCM to explain why it’s so important to be able to build equity:

Homeowner Wealth Increases Through Growing Equity This Year

Homeowner Wealth Increases Through Growing Equity This Year | MyKCM

Building financial wealth and stability remains one of the top reasons Americans choose to own a home, and as a homeowner, your wealth often grows without you even realizing it. In a recent paper published by the Urban Institute, Home Ownership is Affordable Housing, author Mike Loftin illustrates how homeowners increase their equity and their wealth simply by making monthly mortgage payments:

“The principal portion that reduces the loan balance builds the homeowner’s equity. In doing so, the principal payments behave like an automatic savings account. The principal payment is not money going out; it is money staying in.”

But home equity – the difference between the value of your home and what you currently owe – isn’t just built through your monthly principal payments. Home price appreciation plays a vital role in growing your equity and, ultimately, your wealth.

As Freddie Mac explains:

“Homeownership has cemented its role as part of the American Dream, providing families with a place that is their own and an avenue for building wealth over time. This ‘wealth’ is built, in large part, through the creation of equity…Building equity through your monthly principal payments and appreciation is a critical part of homeownership that can help you create financial stability.”

Homeowners Continue To See Equity Increase

CoreLogic recently published their latest Homeowner Equity Insights Report, and it shows continued growth in equity amidst record home price appreciation. The report provides several key takeaways, all of which point to rising wealth for homeowners:

  1. The average equity gain of mortgaged homes during the past year was $33,400
  2. The current average equity of mortgaged homes is greater than $216,000
  3. There was a 6% increase in total homeowner equity over the past year
  4. Total U.S. homeowner equity has reached nearly $1.9 trillion
Homeowner Wealth Increases Through Growing Equity This Year | MyKCM

Here, you can see the equity gains by state:

Equity Provides Homeowners with Flexibility

In addition to being a critical tool in building wealth, a homeowner’s equity also provides significant flexibility. When you sell your house, the accumulated equity comes back to you in the sale. Recent increases in home equity coupled with record-low mortgage rates mean it could be the perfect time for homeowners looking to make a move.

Mark Fleming, Chief Economist at First Americannotes:

“Existing homeowners today are sitting on record amounts of equity. As homeowners gain equity in their homes, the temptation grows to list their current home for sale and use the equity to purchase a larger or more attractive home.”

Increasing equity also helps families facing challenges brought on by the pandemic. Frank Martell, President and CEO of CoreLogic, explains in the recent Homeowner Equity Insights Report:

“Homeowner equity has more than doubled over the past decade and become a crucial buffer for many weathering the challenges of the pandemic. These gains have become an important financial tool and boosted consumer confidence in the U.S. housing market, especially for older homeowners and baby boomers who’ve experienced years of price appreciation.”

Bottom Line

Home equity has always been a powerful wealth-building tool, and homeowners continue to see their financial stability increase. Let’s connect today so you can better understand how much equity you have in your current home or if you’re ready to take the next step in building your savings as a homeowner.

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