For most American households, home equity is the principal form of wealth. Equity is the value of a home minus all debt, such as mortgages and home equity loans. If your home is free and clear of the debt, the entire value of your home is your home-equity wealth.
Across the United States, the value of housing stock and the amount of home-equity wealth have risen dramatically the past five years. The average gain in wealth is about $11,000 per homeowner. Housing wealth is more concentrated in two groups of homeowners: older Americans ─ most of whom have paid down their mortgages and whose homes have appreciated over time ─ and those who have good credit.
Older homeowners with a mortgage hold more than one-third of America’s housing equity, up from one-fifth in 2006. About one-third of the properties are owned free and clear without any home debt, and 64 percent of those mortgage-free homes are owned by people over 60.
Equity grows with good credit habits
Housing equity has also become increasingly concentrated in the hands of people with high credit scores. The 37 percent of mortgage borrowers with credit scores above 780 hold half of all borrowers’ housing equity, up from about 40 percent a decade ago.
This shift in equity ownership can probably be attributed to the issues that contributed to the housing crisis. When people no longer had equity to tap after 2008, they were no longer taking money out. By 2010, equity extraction was hovering around zero, where it remained through 2012.
Older owners resist accessing equity
Nationwide, homeowners 65 and older could collectively access more than $3 trillion in home equity, but only 6 percent of senior homeowners have indicated interest in tapping into equity to help meet retirement financial needs. At the same time, nearly 37 percent of senior homeowners are concerned about their financial situation in retirement.
Why are older homeowners so reluctant to draw on housing wealth to secure a more comfortable retirement? A recent Urban Institute study confirmed that many seniors tend to be financially conservative and want to avoid debt. The study found that this behavior could be related to their desire to leave a bequest or to save for emergency expenses or long-term care.
This has led to enormous amounts of untapped housing wealth, which can be used to further boost wealth with an investment property or other means of diversifying while still keeping a secure nest egg. As the protection put in place over the past decade continues to reassure investors, perhaps more Baby Boomers will manage their assets to make their lives more comfortable and safe.
Published July 11, 2017