Uses of Home Equity Loans Show Benefits of Homeowership

According to the Census Bureau’s latest data, the U.S. homeownership rate edged lower to 63.1 percent in the second quarter of 2016, with the homeownership rates falling across all age groups. [1] This is the lowest rate recorded since 1980, based on this quarterly survey.[2] The declining trend in homeownership is disheartening because homeownership is very much a part of the American dream. According to NAR’s 2015 Q4 HOME Survey, 87 percent of U.S. households view homeownership as part of the American Dream, and among renters,  83 percent want to own a home in the future.[3]


What are the financial benefits of homeownership? One way to answer this is to look at how homeowners use their home equity gains. According to the February 2016 Survey of Consumer Expectations of the Federal Reserve Bank of New York (FRBNY)[4], respondents who availed of a home equity loan or a line of credit used the loan for activities relating to home improvement, paying down debt, for business and financial investments, and education financing—all of which enable the current homeowner and their children to move up the economic ladder and enjoy a better quality of life. According to the latest survey, respondents used the loan for home improvement, which can add further value to the property (50.5%); to help pay down other debt such as credit card, auto loan, and medical bills (46.6%); to pay for college/education (9.7%); to make a downpayment on a second home or investment property (6.3%), to make other financial investments (5.5%) or invest in a business (1.7%).  About six percent use the equity gain for vacation or for regular living expenses, which can be viewed as “consumption spending”. However, the FRBNY survey seems to indicate that most borrowers of home equity loans or lines of credit are responsibly using home equity credit for activities that improve their long-term financial condition or that enable the homeowner to tap the money when it is needed the most (e.g., help a family member).


Home equity gains not only help the current homeowner, but it also appears to raise the income of homeowner’s children as adults. A study by the Federal Reserve Bank of Boston economists Dr. Daniel Cooper and Dr. Maria Jose Luengo-Prado which was presented at a REALTOR® University Speaker Series found that for every 10 percent gain in home prices, the income of homeowner’s children as adults increases by nine percent (relative to case where home prices have not increased), while the income of renters’ children as adults fall by 15 percent.[5]

The benefits of homeownership go beyond the financial aspects. In fact, according to the NAR’s 2015 Q4 HOME Survey, the primary reason for owning a property is less tied to it being a “financial investment” than as a “home” to raise a family in  a stable environment.  According to NAR’s survey, the primary reason pertains to “lifestyle considerations such as getting married, starting a family, or retiring” (35 percent of homebuyers). Another major reason is the  “desire to settle down in one location” (18 percent of homebuyers). The latter may be related to the need for parents to provide a stable environment for their children to thrive socially and academically. Indeed, there is much evidence that residential instability correlates with lower educational and social development among.[6]  “Improvement  in financial situation” was cited as the primary  reason by 15 percent of homebuyers.


In short, the dream of homeownership is one that a majority of households desire because homeownership is viewed as a way to establish and raise one’s family in a stable and safe environment. The responsible use of equity gains from homeownership provides a source of income and wealth that can enable the current homeowner and one’s children to move up the economic ladder of opportunity and success.

[1] Thanks to Danielle Hale, Managing Director, Housing Statistics, for her review of this blog. All errors are solely the author’s.

[2] The U.S. Census Bureau’s quarterly estimate of the homeownership rate based on the Current Population Survey and Housing Vacancy Survey is the widely quoted data. Other annual estimates are also available such as from the Census’s American Community Survey.

[3] National Association of REALTORS®, 2015 Q4 Housing Opportunities and Market Experience (HOME) Survey,http://www.realtor.org/reports/2015-q4-homeownership-opportunities-and-market-experience-home-survey s

[4] 2016 Survey of Consumer Expectations-Housing Survey, Federal Reserve Board of New York. https://www.newyorkfed.org/medialibrary/interactives/sce/sce/downloads/data/FRBNY_SCE_Housing_chartpacket2016.pdf

[5] Dr. Daniel Cooper’s presentation can be found at http://economistsoutlook.blogs.realtor.org/2016/08/08/house-price-growth-when-children-are-teenagers-a-path-to-higher-earnings-a-realtor-university-speaker-series-presentation/

[6] Sandstrom, Heather and Huerta, Sandra,“The Negative Effects of Instability on Child Development,” Low-Income Working Families Discussion Paper 3, Urban Institute, September 2013.