According to the Consumer Federation of America, home equity accounts for most of Americans' wealth. However, buying a home may not make financial sense for everyone.
- By A+ Illinois and Marilyn Kennedy Melia
- August 19, 2001
The people living next door may not be millionaires, but if they own their
own home, chances are good that they have some significant wealth.
According to a study released last month by the Consumer Federation of America (CFA), the affluence of most Americans is based on homeownership more than any other factor.
More than one-half of all American households headed by someone age 45 or over had net assets of at least $100,000 in 1998, according to an economic analysis of the most recent Federal Reserve data on household wealth commissioned by the federation in conjunction with Providian Financial, a San Francisco-based financial institution. Thirty-four percent of that wealth comes from equity in their primary residence, while only 17 percent comes from retirement accounts and 11 percent from stocks, bond and mutual fund holdings outside of retirement accounts. For households with net assets of $100,000 to $250,000, home equity is an especially important source of wealth, making up 43 percent of these households' assets. (Equity is defined as the part of a home's value that is not mortgaged, but owned outright.)
"Contrary to the belief of many, those with modest incomes can, over time, build wealth," says Stephen Brobeck, the federation's executive director. "The easiest way to do so is to buy a home, faithfully make the mortgage payments and be cautious about borrowing the accumulating home equity."
Because home equity accounts for most Americans' wealth -- the study shows that only in millionaire households do other assets such as stocks make up the bulk of affluence -- housing can be considered the "poor man's savings account," says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University in Tempe. During the recent refinancing boom, many households, especially those headed by younger homeowners, are eroding their equity by taking "cash-out refinancings," he says. With this technique, whereby borrowers take a new, larger mortgage and pocket the difference, homeowners are using their equity like a financial management tool. They're paying down higher-interest credit card debt with their cash-out proceeds, or using the low-interest mortgage funds to finance other purchases, says Butler. And, while homeownership may be the easiest route to wealth, it's not easy for many people, particularly lower-income individuals and minorities, to actually buy a home and see its value rise.
For one thing, over the last couple of decades, numerous studies have shown that mortgage lending practices have been biased against minorities, with more people of color being denied a home loan than whites. Regulations as well as increased awareness among lenders has helped to get rid of lending discrimination, but it still probably exists to some degree, says Dan Immergluck of The Woodstock Institute, a Chicago non-profit that studies lending issues.
Also, the upfront cash required for a down payment and closing costs can be prohibitive for lower-income people, says Immergluck. Again, lending institutions and federal lending regulators have made strides in opening the doors to homeownership wider by reducing upfront cash requirements. But it's only those with good credit histories and the awareness of special low-down-payment programs who actually find themselves able to buy.
Moreover, it just may not make economic sense for some people to buy, even though the CFA-Providian study shows that most Americans garner their wealth by owning their home.
"Younger people as well as lower-income people tend to move around a lot, and they shouldn't buy homes because it takes a number of years to recoup the closing costs and the upfront costs," says Immergluck. Moreover, some Chicago neighborhoods don't show significant housing price appreciation, notes John McCarron of the Metropolitan Planning Council
. Minorities who don't want to live in or feel shut out of white or racially mixed neighborhoods may be making an economical choice to shun ownership.
Still, the haves and have-nots are most readily characterized by whether they own their home. The CFA-Providian study just looked at the accumulated level of wealth in households, but owning a home also pays immediate benefits, because a homeowner can deduct all his mortgage interest from income, and pay less in taxes, say Rochelle Nawrocki, director of program development and government relations at Neighborhood Housing Services of Chicago (NHS). One of several non-profits that help people become homeowners, NHS offers home-buying counseling (call 312-738-2227). "We don't want to put anyone in a home who can't stay and benefit. But buying can be a great way to accumulate equity," notes Nawrocki.