In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi dig into recently released Survey of Consumer Finance data with Economist Ksenia Potapov to explain why they’re thankful for homeownership and its wealth-generating benefits.
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“For the majority of households that transition into homeownership, the most recent data reinforces that housing is one of the biggest positive drivers of wealth creation in this country. Homeownership has many benefits, including wealth creation, as we just mentioned, stability, fixed payments and a longer-term benefit of generational wealth. And that's why we're thankful for homeownership.” – Odeta Kushi, deputy chief economist at First American
Odeta Kushi - Hello, and welcome to episode 77 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American and Ksenia Potapov, economist at First American.
Mark Fleming - Hi Odeta, and welcome back, Ksenia.
Ksenia Potapov - Hi, everyone. Thank you.
Mark Fleming - Well, Happy Thanksgiving. I, for one, am looking forward to some turkey. Deep fried, of course. Roast potatoes, instead of mashed, that's the English heritage in me. All the great sides. And, of course, my favorite, pecan pie.
Odeta Kushi - Pecan Pie. Interesting choice, not apple or pumpkin?
Mark Fleming - You know, I've always really wanted to like the pumpkin pie, but there's something about that sweet, sweet filling in a pecan pie that I can't resist.
Ksenia Potapov - Not the pecan pie, but I have questions about deep-fried turkey. But I think on second thought, I don't want to know the answers. I have proposed to my family that we move away from turkey this year. We felt bound by tradition to eat this dry, dry bird that takes forever to cook. And we might finally feel comfortable enough to break that tradition this year.
Odeta Kushi - Well, there's always tofurkey.
Mark Fleming - Yeah, I think I'll pass on the tofurkey. And I'm really all about the traditions. And so, since we have a tradition here at Thanksgiving, and I think for the housing market, one where we really need it this year more than most, we're going to talk about something that we've always been thankful for -- homeownership.
Odeta Kushi - Well, we often talk about the benefits of homeownership and make the point that owning and renting a home are very different, precisely because of housing wealth. For example, when we compare the monthly cost of renting and homeownership in our recent rent-versus-own analysis, we add up all the monthly costs of homeownership, like the principal and interest payments, taxes, insurance and the cost of repairs. And then we include the benefit of house price appreciation, we subtract appreciation from the monthly cost to own, and it makes a world of a difference when making the comparison to renting, because it often makes owning cheaper. In fact, when you take away the benefit of appreciation, it has always been cheaper to rent than to own going all the way back to the year 2000. That equity benefit -- that's really accumulating housing wealth. You own an asset, it's appreciating, contributing to an increase in wealth.
Mark Fleming - Right homeownership is always touted as an effective, dare I say the most effective, way to build wealth, especially for low-income households. But reducing the benefit of housing wealth to just the monthly cost doesn't show the entire picture. So, today, we're going to walk through the data on the role of housing wealth and Ksenia. Our expert on this matter is here to help us do that.
Ksenia Potapov - Yes, and it's perfect timing. We might even say we planned this because this data was just released. So every three years the Federal Reserve Board releases a big survey, called the Survey of Consumer Finances, or SCF, which collects very detailed accounts of households finances, bank account balances, retirement savings, property vehicles, mortgage debt, student loans, everything under the sun, to essentially create a balance sheet of families' assets and debts. And based on all of this information, the survey tracks family wealth over time.
Odeta Kushi - Those interviews must take forever to get through. No wonder the survey is triennial. But the data is very unique. This is why you, Ksenia, have been impatiently waiting for this data to come out.
Ksenia Potapov - I can confirm I was refreshing the survey page every day in September and October until it came out. One quick note. The basic unit of survey in the SCF is a family, which differs from the way other government surveys define family and is more closely aligned with the definition of a household. For ease, we will be using family and household interchangeably throughout this episode, because for our purposes, the differences are not very important. So, the latest survey, which captures data from 2022 was released this October, which is why I was refreshing the page. The previous survey was done in 2019. So we now have a pretty comprehensive picture of what happened to household wealth over the pandemic.
Odeta Kushi - Well, the pandemic period was a tumultuous one to say the least. So what is the verdict?
Ksenia Potapov - Alright, drumroll please. According to the 2022 SCF, median net worth -- that's total assets less total debt -- increased 37% between 2019 and 2022, adjusted for inflation.
Mark Fleming - Wow, that's a big number. That strikes me as being especially a big number.
Odeta Kushi - Yeah, it sounds like a lot because it is. This was the largest three-year increase over the history of the modern SCF, which stretches back to 1989, and more than double the next largest one on record, net worth didn't just increase for the median household. It also increased for households across the entire income distribution, though, of course, there was a lot of variability between households.
Mark Fleming - Now, I'm guessing that, despite the fact that we had a global pandemic between the two surveys, households benefited probably from the several rounds of fiscal stimulus during the pandemic, the phenomenally tight labor market that we've been experiencing for the last few years, and near and dear to our heart, the double-digit growth in house prices.
Ksenia Potapov - Near and dear indeed. We can definitely see that in the data. So, for families that owned a home, the median net housing value, that's the value of a home minus home-secured debt, increased 44% between 2019 and 2022. From about $139,000 to $201,000. The increase was again the largest on record over the history of the modern SCF. Meanwhile, mortgage debt was pretty much unchanged between 2019 and 2022, about 42% of families in both 2019 and 2022 had debt secured by their primary residence, and the median amount of home-secured debt decreased by less than 1% to just $156,000 in 2022.
Mark Fleming - Okay, a little economist math here. Home values increased, mortgage debt stayed basically the same. That sounds like a, dare I say, Thanksgiving recipe for an increase in wealth.
Odeta Kushi - Oh, my goodness, okay. Well, that's great news. Now, these are the overall statistics for all families. But, with the SCF, we have the ability to dive deeper and look at the differences in wealth between homeowners and renters. And we know there's a big difference in wealth between the two.
Ksenia Potapov - Quite a big difference. So the median homeowner has 38 times the household wealth of a renter, according to the latest data.
Mark Fleming - We need to pause on that number for a second. You said 38 times more for the homeowner?
Ksenia Potapov - Yep, that's a huge difference. Over $396,00 for homeowners compared to approximately $10,400 for renters. That gap in wealth actually narrowed ever so slightly since 2019. It has been narrowing since 2016, when homeowners had 46 times the wealth of renters, so we've come a long way. And this is consistent with the finding that there has been some narrowing of the wealth distribution between surveys.
Odeta Kushi - Analyzing the difference in wealth between renters and homeowners by income level further underscores the wealth-building power of homeownership. That doesn't indicate cause and effect necessarily, nor does it provide insight into the distribution of wealth. We know that homeowners tend to be older, more educated and have higher incomes.
Mark Fleming - Always bring up valid economic points there, Odeta. There are possibly other causal reasons for differences in wealth between the two groups. But can we do even better, and try to control for these reasons?
Ksenia Potapov - Well, we can look across income distribution. So homeowners are wealthier than renters at every income level. For families in the bottom 20% of incomes, median net worth was nearly $147,000 for homeowners and only $3,400 for renters.
Mark Fleming - Well, it makes sense. Even if you are a homeowner at the low end of the income distribution, you own a house and it appreciates.
Ksenia Potapov - That part is very important. So, for homeowner households at the bottom 20% of the income distribution -- those making $31,000 or less -- the average value of a primary residence increased by $160,000. More than all other asset types. For households in the top 10% of the income distribution by comparison -- those making over $250,000 -- the average value of the primary residence increased by about $410,000, which is a lot more. But the value of other assets increased more or nearly as much, so there's not nearly as much of an outsized effect from housing on this group.
Mark Fleming - And now we're really getting into a little bit more of what the potential explanations of why homeownership is particularly beneficial for lower income households. The majority of homeowner wealth comes from housing for every income category except for the very top earners. The lower the income of a homeowning household, the greater the share of its wealth comes from homeownership. This pattern has actually remained consistent for the last three decades, according to historical SCF data.
Ksenia Potapov - Yes, and in 2022, housing wealth represented on average approximately 75% of the total assets of the lowest income households. For households in the middle of the income distribution, housing wealth represented between 48% and 74% of total assets. But for households in the top 10% of the income distribution, the wealthiest households, that share was only 33%.
Mark Fleming - Wealthier households tend to have more diversification in their assets. They own more in financial assets, like stocks, bonds, mutual funds, and retirement accounts. They also tend to own more non-financial assets that aren't residential property. For example, a stake in a business or non-residential real estate. The difference in the composition of wealth means that fluctuations in home prices will have a much bigger impact on the wealth of lower income families than of those that have a mix of other assets. But, unlike other types of assets, like stocks or business equity, housing is relatively safe, and historically has steadily appreciated.
Odeta Kushi - Right, house price declines are infrequent, especially very large house price declines like what we saw during the Great Financial Crisis. Historically, house prices have increased by an average of 3-4% per year. That means that, on average, homeowners see an equity gain in the long run, though there is always risk of volatility.
Ksenia Potapov - Certainly, there are risks from homeownership and its benefits are not uniform across all markets. As we know real estate is local. So some markets may experience stronger price growth than others. But, despite the risk of volatility in the housing market, numerous studies have demonstrated that homeownership leads to greater wealth accumulation when compared with renting. There's a couple of mechanisms through which this happens. Obviously, renters don't capture the wealth generated by house price appreciation. Yet, for homeowners, when the price of the home increases, your equity stake in that home increases, if you have a mortgage, or increases outright, if you own the home free and clear. Second, the monthly mortgage payment acts as a sort of forced savings, you're putting money away every month and a portion of it, the principal is going to pay for the home.
Odeta Kushi - So, now it makes sense that people refer to a house as a piggy bank, because you're essentially storing money in a house.
Mark Fleming - And you can sometimes pull it out without selling the house, like with a cash-out refinance, to improve the house or send a child to college or something like that.
Odeta Kushi - So, even better than a piggy bank, really. Not to mention, unlike most investments, you can live in this one. It's a pretty unique benefit.
Mark Fleming - That's an important one. It's a store of wealth and the service provider of shelter.
Odeta Kushi - Exactly. So, in conclusion, for the majority of households that transition into homeownership, the most recent data reinforces that housing is one of the biggest positive drivers of wealth creation in this country. Homeownership has many benefits, including wealth creation, as we just mentioned, stability, fixed payments and a longer-term benefit of generational wealth. And that's why we're thankful for homeownership.
Mark Fleming - With all of those benefits, it's no wonder we worry about affordability for the first-time home buyer and the availability of affordable housing. Thankful for all the benefits that homeownership provides, and hopeful that we can find ways in the housing market to provide those benefits to many more in the future. Thank you for joining us, Ksenia.
Ksenia Potapov - My pleasure.
Mark Fleming - Now, let's talk about deep-fried instead of dry, real turkey. It's really easy.
Ksenia Potapov - I am never coming back.
Odeta Kushi - See what you did, Mark?
Mark Fleming - It's not that bad.
Odeta Kushi - Now, as for the music, if you need some tunes to accompany you this Thanksgiving, we have compiled a playlist of all of the songs mentioned on previous episodes of this podcast featuring '80s hits and even Beyonce.
Mark Fleming - I can vouch for this one. I have been so thankful for the REconomy playlist all week. It's so good. And, for those who don't like '80s music, there are other things. Beyonce and beyond the 80s theme, although I do gravitate to the '80s songs.
Odeta Kushi - You can thank me for anything that's not '80s, by the way. All right. Well, that's it for today. Thank you for joining us on this episode of The REconomy Podcast. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2023 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.