Who Will Get Future Housing Wealth?

Irrespective of who wins the election, wealth will be more unequally distributed four years from now. The reasoning is that rental households have been rising while the number of homeowners has not increased. Homeowners over the long haul build wealth as they pay down their mortgage.  A portion of the monthly mortgage goes towards principal reduction. Now, in addition to steadily paying down the mortgage debt over time, home price growth will help enlarge the housing equity. Home prices have clearly turned for the better and this rise in price will add to homeowners’ wealth. Home price changes by various metrics are shown below. Keep in mind that recent gains are immediate wealth for recent home buyers. However, for those who bought near the peak, it may take many years to fully recover the lost wealth, with Las Vegas possibly taking up to 10 to 15 years those who have yet to restructure their mortgages.

According to the Federal Reserve the total asset value of residential real estate was $19.1 trillion as of the second quarter of this year. It had been at $18 trillion and change throughout the low points from 2009 to 2011, before finally breaking out higher this year. A 15 percent cumulative price appreciation over the next four years (an average of less than four percent annual gains), which can be considered as a conservative projection given the recent developments of housing shortage conditions, will translate into a total real estate asset valuation rising to $22 trillion by the next Presidential election. Therefore a gain of nearly $3 trillion, shared among 75 million homeowners, yields $40,000 capital gains per homeowner on average.

Another way to view the situation is via separate data from the Federal Reserve on people’s net worth. Historically, renters’ wealth barely rises over time. While homeowners’ wealth changes mostly based on movement in home values but also by changes in stock market wealth (since many homeowners also have funds in 401K and/or other retirement accounts). For the most recent year for which data was available, a typical renter had a net worth of $5,100 while a typical homeowner had $174,000 in 2010. We know that some homeowners have nothing after undergoing foreclosure or after a short-sale. But still, there are still a sizable number of homeowners who bought homes many years prior to the bubble peak years and are still doing quite well.

What will be unique about the housing equity distribution is that a less-than-normal number of people are able to become homeowners today because of the need to repair damaged credit scores and from excessively tight underwriting standards. The most opportune time to become a successful homeowner is when people enter the market when the prices are low. From a policy perspective, government should ease credit when prices are low and tighten credit when prices are high. Unfortunately, mortgage accessibility has run exactly opposite with overly stringent conditions today (when prices are low) and excessively lax credit availability during the bubble years (when prices were high).

Based on who has been buying a home in the past few years when prices were low and who are prevented from becoming homeowners because of excessively tight credit, it is already baked-in such that wealth distribution in America will be more unequal four years from now.