In the last two years, Americans who own their homes have gained more than $6 trillion in housing wealth. To be clear, this does not mean that homebuilders transferred $6 trillion in new housing to buyers, or that existing homeowners made $6 trillion in kitchen and bathroom improvements.
Instead, most of that money was created by the simple fact that housing, in short supply and high demand in the United States, appreciated at a record pace during the pandemic. Millions of people – widely distributed among the 65% of American families who own their homes – have earned a share of that windfall.
It’s a hugely 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 skyrocketing. Inflation is reducing your earnings. And the very thing that created all that wealth has pushed homeownership as a means of building wealth even further out of reach.
This dual reality follows what has been 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 rose the most during the pandemic, but fewer Americans profited from it. During the last housing boom, the rise in home values was similarly dizzying, but limited to fewer parts of the country. And that equity has largely disappeared in the kind of meltdown that economists say is far less likely to happen this time around. Perhaps a better analogy, Keys suggested, would be the land rush in the Oklahoma Territory in 1889, or the Los Angeles oil boom in the 1920s, events that abruptly changed who owned the land and how much it was worth.
The $6 trillion sum, estimated by the Federal Reserve, does not count all equity in rental properties. So it’s an understatement of the riches accumulating in the real estate market lately.
Hard-to-predict events like a painful recession could still recoup some of that total, of course. Property taxes can go up. And that wealth is not the same as having money parked in a bank account. To use it, families must either sell a home or leverage its value through a tool like an equity loan, and this is not risk-free. But the evidence shows that homeowners exercise real estate in real ways — to send their kids to college, start businesses, invest more in housing, build even more wealth.
“There’s a rosy scenario and a not-so-rosy scenario,” said Emily Wiemers, an economist at Syracuse University who has studied how families use their real estate to pay for higher education. “The other side is quite worrying. There’s this set of kids whose parents don’t own a home and therefore haven’t seen this increase in wealth, and also whose parents may have seen declines in income.”
Understand inflation in the US
The cumulative effects are wide-ranging and divergent: this period of increasing equity will allow some households to create intergenerational wealth for the first time. This will force other families to put off home ownership for years.
This will widen inequality, as the gains go disproportionately to baby boomers (at the expense of millennials who will one day buy their homes) and white families, who have a 30 percentage point higher ownership rate than black families. But black home-owning families will benefit in particular because the wealth of black families is predominantly in the form of housing.
“I don’t think there’s a viable alternative to homeownership right now” in terms of building wealth, said Cy Richardson, senior vice president for programs at the National Urban League, which promotes homeownership among black families. “And it’s an economic disaster for black families who can’t afford to own a home.”
The highest-income families, who own the most expensive homes, had the greatest total gains. But because home ownership is so widespread in the United States, the poorest fifth of households have also added billions to homes in the past two years. In percentage terms, they saw the biggest increases in wealth.
Homeowners who remember the 2008 housing crisis may be nervous about it all. But this is a very different housing market, said Mark Zandi, chief economist at Moody’s.
The bubble in the early 2000s was defined by risky borrowing and overbuilding. Today, homebuyers are on much more solid ground with their credit scores, conventional mortgages and pandemic savings. Today there is also a housing shortage across the country. And that has collided with growing demand from historically low mortgage rates, from families looking for more space during the pandemic, and from remote workers who could move to more affordable places. Home values, as a result, have risen almost everywhere (making many of these affordable places not so affordable anymore).
Price growth is likely to slow now that interest rates are rising rapidly, but economists generally don’t expect prices to fall. There is too much demand for too little housing in America today. Raising rates will make access to equity more expensive. But that heritage, Zandi said, “will be largely durable.”
Black Knight, a company that tracks the mortgage market, estimates that the average homeowner with a mortgage has earned $67,000 in “exploitable equity” in the past two years. This is real money that families can access while still keeping 20% of the equity in their homes, as lenders often demand.
By this measure, the average mortgage holder in the San Jose, California metropolitan area has raised $230,000 in two years. In Boise, Idaho, it’s $114,000. In Cleveland, it’s $27,000.
“For most American families, this is great,” said Michael Lovenheim, an economist at Cornell. “And it’s not just for the super-rich, and it’s not just for those who live in the big city superstars. This is also happening in Ithaca.”
frequently asked questions about inflation
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 prices for everyday goods and services, such as food, furniture, clothing, transportation, and toys.
Mr. Lovenheim found that families who had a higher house price increase 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 universities than community colleges.
He and his colleagues also found that families 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 home Julio Velezon II managed to buy in 2019 in Springfield, Virginia, changed his life in a measurable way. He and his wife had their first child in that house. So they were able to buy a bigger house for a single family in December, keeping the first house as a rental property.
If they hadn’t bought it 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, he said, would mean not having a child.
“I wouldn’t feel comfortable having a child when we were moving and renting,” said Velezon, a 35-year-old Air Force technical sergeant. “Rent is such an unknown variable – it’s at the mercy of someone else, the market.”
Now he imagines that his 18-month-old son could live one day as an adult in one of these houses.
Similar stories are increasingly out of reach for other families who come to First Home Alliance, a northern Virginia-based nonprofit housing advice organization that has helped Velezon. Today, a family earning $70,000 a year cannot compete for a three-bedroom apartment 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 housing wealth). “We can educate them about the process, make them fully qualified for accessibility. But they cannot buy in this area.”
They will wait, instead, for their incomes to rise, or for house prices to cool, or for new home construction to increase.
But going forward, Keys, a Wharton professor, worries that all this housing wealth will only reinforce aspects of the US housing market that are fundamentally problematic: that families feel they have few alternatives to building wealth, that housing must function as both shelter and financial asset, that owners are motivated, as a result, to protect that asset.
“Actually, there’s something that’s kind of mischievous about it,” he said. In a way, millions of people have made trillions of dollars in the last two years without doing anything.
“But it’s worse than that,” he continued. “It’s not that they’re not doing anything; is that they have aggressively blocked development in so many places.”
This wealth was created, he said, precisely because it is very difficult to build housing in the United States. And that can make it even more difficult to build more.