How Much Are Homeowners Worth?
KEY POINTS¹
64.9 % of families own their primary residence
42.1% of families had debt secured by a primary residence
Approximately 1/3 of homeowners do not have a mortgage
How wealthy are your friends and neighbors?
A little too taboo?
No, it is not.
We are engrained from an early age to get educated, work hard, take risks, make financial sacrifices for our kids, and if all goes well, we will be rewarded with a middle-class lifestyle complete with annual vacations and a comfortable retirement.
Of course, there will be several twists and turns along the way. It would be unwise to embark on such a journey without a strategic plan to maximize your chances of achieving your goals. A well thought out legacy plan can provide a road map to navigate your way into the middle-class and beyond.
Part of any legacy plan includes setting financial targets and comparing actual results to budget results. We have no problem comparing our investment advisor’s actual investment returns against a benchmark. Such is one prudent step of many when assessing an advisor’s value add to your legacy goals.
It is only natural to apply this concept of comparability to your family, friends, and neighbors.
You work hard. They work hard. Some invested in homes. Others decided to rent and invest in other areas.
Who is wealthier?
Did you make the right financial decisions?
Why did we just mention home ownership?
Home Ownership and Wealth
We will focus on home ownership as it is often the largest investment a family will ever make. In many cases, such investment will significantly exceed all other investments made by the family. It seems only natural to delve into home ownership at a macro level.
Yes, we will be reviewing the general profile of homeowners from a macro level as opposed to granular profiles of homeowners from specific regions.
The following table is a good starting point as it summarizes holding percentages and asset values across several key asset categories.
¹ Federal Reserve Bulletin
Before we dig into the numbers, a word about Median vs Mean. Median is the middle value of all persons in the sample (i.e., 50% are above the value and 50% are below the value). Mean is the average value of all persons in the sample. As expected, mean values exceed median values.
To illustrate, we will consider a sample consisting of 3 individuals with incomes of $50,000 / $150,000 / $1,300,000. The median value is $150,000 and the mean value is $500,000.
The table illustrates a substantial difference between median and mean values. Such reflects the highly disproportionate share of financial assets held by some households.
The 64.9% of homeownership of a primary residence is not surprising and was up 1.2% from the 2016 survey. The median value of such ownership was $225,000 and exceeded all other asset classes. The investment concentration in residential property is further demonstrated when we consider 13.1% of families held other non-primary residence property with a median value of $160,000.
The wealth concentration in the top deciles of the population is evident from the mean (average) value of primary residence $344,200 (vs median $225,000) and non-primary residence $400,300 (vs median $160,000).
Home Ownership and the Power of Leverage
Such wealth provides the opportunity for leverage. When utilized wisely, leverage can enhance returns and exponentially increase your net worth. Conversely, leverage can be devastating to your net worth if it is poorly managed.
The following chart provides insights into family’s propensity to borrow and how such borrowing is distributed.
¹ Federal Reserve Bulletin
Not surprisingly, debt related to residential property exceeds all other categories, just as the amount invested in residential property exceeds all other categories.
Approximately 42% of families held debt secured by a primary residence. Such debt had a median value of $134,800 and mean value of $180,800. The preceding chart highlighted that approximately 65% of families own a primary residence. Such implies that approximately 2/3 of homeowners have home secured debt and approximately 1/3 of homeowners own their primary residence debt free.
The highlights noted provide great insights into the overall population that participated in the survey. Let us take a moment to see how such translates to different segments of those surveyed.
Home Ownership by Income Level
¹ Federal Reserve Bulletin
This chart clearly illustrates that home ownership is highly correlated with income levels. Not only does the ownership percentage increase with income, but so does the net value of the property.
The net home value above is calculated as the home’s market value less any debts secured by the home (e.g., outstanding mortgages, home equity loans, and home equity lines of credit).
The previous charts highlighted a median home value of $225,000 and a median debt value of $134,800. Such would incorrectly imply a net median home value of $90,200. Such does not equal the median home value of $120,000 in the above table. Such is because two median values cannot be netted as such will typically yield an inaccurate result.
The tables and insights provided support commonly held beliefs pertaining to the positive correlation between home ownership, income potential, and net worth.
We started this post by asking how wealthy your family, friends, and neighbors are. We now have a good understanding of a typical family’s financial profile. Specific family profiles will vary greatly based on a myriad of variables: geographic location, specific housing market, education, size of family, career, etc.
These insights lead to multiple questions:
Should You Buy or Rent Your Home?
How does education impact career choices, income potential, and likelihood of home ownership?
Your home has the potential to become one of your largest asset holdings. We recommend you seek proper advice from independent professional advisors with respect to all aspects of such an investment decision. It is critical that you have a framework from which to assess and choose advisors well aligned with your goals as described in our post How to Choose a Financial Advisor - A Definitive Guide.
REFERENCES
¹ Federal Reserve Bulletin Vol. 106, No. 5, September 2020. Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances Click Here for Federal Reserve Bulletin
