Homeownership is the largest source of wealth among households. Housing wealth contributes positively to the homeowner’s and children’s economic condition because the home equity can be tapped for expenditures such as investing in another property (which can generate rental income), home renovation (which further increases the home value), a child’s college education, emergency or major life events, or expenses in retirement.
Housing wealth (or net worth or equity) is built up over time via the home price appreciation and the principal payments that the homeowner makes on the loan. NAR calculated the gains in housing wealth (equity) over a 5, 10, 15, 30 year holding period using NAR’s median existing home price data, assuming a 20 percent down payment and a 30-year fixed rate mortgage. These calculations are illustrative of the magnitude of the wealth gains over time. Actual wealth gains will vary by property and type of financing.
Nationally, most of the wealth gains accrue from the appreciation in home values. As of 2018, a homeowner who purchased a typical existing home five years ago (2013) gained $79,488 in wealth (equity), of which $64,200, or 81 percent was from the home price appreciation ($197,400 in 2013 to $261,600 in 2018). Homeowners who move typically do so in 10 years, so a homeowner who bought a home 10 years ago (2008) would have $91,081 in home equity gains as of 2018).[1] The longer the holding period, the larger is the increase in wealth due to the home price appreciation and the cumulative principal payments, which reduce the loan balance.
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[1] To be clear, these are changes in wealth or home equity between two time periods or over n holding periods. If one wants the level of the home equity at a point in time, one has to add the down payment.
