Economists' Outlook

Housing stats and analysis from NAR's research experts.

The Impact of Financial Literacy on Homeownership: Financial Literacy Indicators

Financial literacy is the “ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.”[1]  Yet despite its importance, financial literacy can often seem like the elephant in the room of many households. The topic of money and wealth is addressed in a variety of ways for different cultures. For example in some households, there are little to no conversations about money, or how to manage one’s income and financial assets. In other households, families support each other financially and pool their resources to generate and build wealth. Finally, there are households that have detailed conversations and plans of passing down generational wealth.

Ideally, parents should teach their children how to manage money or how to improve our economic well-being. However, without parental guidance, it takes personal initiative to learn, or possibly a mentor to pass on the ins and outs of money management. If parents or peers understand and practice sound financial management, it is more likely for children to have good financial habits and knowledge of the wise use and investment of resources. Those who inherit money are not always destined to keep it, but they will have a head start at obtaining more or maintaining it over those who do not.

Homeownership is one of several means of building wealth, but owning a home takes financial preparation in terms of building up savings and developing creditworthiness. Financial literacy is an important determinant of homeownership because it affects savings behavior. If parents do not teach the right values and skills, we can see some of the reasons why it is difficult for adult children to make strides in making sound financial decisions, including purchasing a home.

Let’s take a look at important financial literacy indicators and how a low level of financial literacy may be contributing to the current wealth gap, the variation in homeownership among ethnic groups, and the importance of financial literacy in addressing these issues. We will also look into homeownership rates among various ethnic groups, along with average family wealth and average retirement saving.

Financial Literacy Indicators

According to the Next Gen Personal Finance[2],

  • Only 16.4% of U.S. students are required to take a personal finance course to graduate high school.
  • Five states do have a personal finance requirement: Alabama, Missouri, Tennessee, Utah and Virginia.
  • Outside of these states, the proportion of students with a personal finance requirement drops to 8.6%.
  • Meanwhile, only 5.5% of low-income schools have personal finance as a requirement.

According to a 2018 Forbes article[3], there are four major indicators contributing to poor financial health:

  • Most Americans do not have more than $1,000 in their savings and 44% do not have enough to cover a $400 emergency.
  • Approximately 43% of student loans borrowers are not making payments, which will also limit their ability to invest and save money.
  • Approximately 38% of Americans have credit card debt, which is going to have an impact on their debt to income ratio. Debt to income ratios directly effect a potential homeowner’s financial ability to borrow money. The higher the debt the less you are able to borrow.
  • Approximately 33% of American adults have zero money saved for retirement. The data on this points out some clear differences when we look at race and how wealth plays a part in saving and owning a home and how financial literacy could positively affect all Americans and more especially lower income families.

The National Bureau of Economic Research[4] produced a study on financial literacy and retirement planning in the United States. It used the new National Financial Capability Study, wherein they showed that financial literacy is particularly low among the young, women, and the less educated. Moreover, Hispanics and Black and African Americans score the least well on financial literacy concepts compared to whites and Asian respondents. It showed that Black and African Americans and Hispanics did not fare well with questions related to interest rates and inflation. Interestingly, all groups rate themselves as well informed about financial matters, despite their actual performance on the key literacy questions. The study concluded that people who score higher on the financial literacy questions are also much more likely to plan for retirement, which is also likely to leave them better positioned for old age.

Household Financial Indicators

Now let us take a closer look into how this is affecting various groups. The Urban institute[5] produced data showing wealth inequality in America. As of 2016, the average retirement savings for White and Caucasians amounted to $157,884, while accounting for $28,581 for Hispanics and $25,212 for Black and African American families. The savings of White and Caucasian families are 6.2 times the savings of Black and African American households and 5.5 times the savings of Hispanics.

In terms of savings growth, the trends among various groups remained consistent. The Urban Institute data pointed out that during the period 1989 through 2016, the savings of White and Caucasian consumers rose by 384 percent (from $32,649 to $157,884), the savings of Black and African American consumers increased 323 percent (from $5,954 to $25,212), and the savings of Hispanic consumers increased by 301 percent (from $7,122 to $28,581). The compounded annual growth rate in savings for White and Caucasian households was 6 percent, 5.5 percent for Black and African American households, and 5.3 percent for Hispanic households. Over this period, in nominal terms, Black and African American and Hispanic households have lagged in the average value of family savings, as they have not surpassed the $40,000 mark. In comparison, for White and Caucasian households, that level was reached in 1992.

Stemming from the above financial trends, and looked from a broader perspective, the average family wealth picture displays similar trends. Based on the Urban Institute study, White and Caucasian households recorded over $900,000 in wealth in 2016. For the same year, Hispanic households posted average wealth of almost $192,000, while Black and African American families showed average wealth of about $140,000.

Considering the above factors, it may not be surprising that homeownership trends mirror wealth trends. From 1976 to 2016, white households have maintained a 68 percent homeownership rate. For Hispanic and Black and African American families, the homeownership rate has moved in a lower range of 39 percent to 46 percent.

Concluding thoughts

Owning a home can be a great long-term investment. In some cases, the same monthly rental payment can be used to pay a mortgage while equity is being built over time. Equity in a home allows families to have saving flexibility, as well as leverage for future investment opportunities. Rents have a tendency to grow 3 percent annually while mortgage payments (e.g. 30-year mortgages) are usually fixed. Most non-owners do want to buy: in the latest Aspiring Home Buyers Profile, 84 percent of non-owners want to buy a home in the future.

For many consumers, it may seem more financially rewarding to have their own property value increase rather than to have monthly payments increase, all other factors being equal. This could provide potential homeowners more saving capabilities, financial security, as well as an asset to sell or pass down to heirs. The owning versus renting argument has been popular over the years and some research points out that the renter would only be as well off as the owner if they were actively saving the difference between the lower rental payment and higher monthly mortgage on other financial investments. This highlights the importance of having a plan and being financially literate.

For more information regarding school aged children and young adult financial literacy, please see

View part two of this series on Student Loan Impact.

[1] This Council was established by President Bush in 2008. Financial literacy is defined in the President’s Advisory Council on Financial Literacy, 2008 Annual Report to the President Executive Summary, p. 10 ( This Council was renamed as the President’s Council on Financial Capability and was in place from January 28, 2010 through January 28, 2013 (

[2] 2017 Next Gen Personal Finance study quoted in “Most High School Student Never Have to Take a Personal Finance Class”, Business Insider; download report at

[3] Dani Pascarella, “4 Stats That Reveal How Badly America Is Failing At Financial Literacy”,

[4] Annamaria Lusardi and Olivia S. Mitchell, “Financial Literacy and Retirement Planning in the United States,” NBER Working Paper Series 17108, Cambridge, MA, June 2011,

[5] Nine Charts About Income Inequality in America (Updated), Urban Institute, October 24, 2017,