As questions go, this one troubles me a lot: Do we love our homes more than we should? It bothers me because I’ve been a homeownership nut my entire adult life.
That’s not hyperbole.
I may be biased when it comes to home ownership
I bought my first, a rooming house in Boston’s South End, at age 23. I’ve been buying and fixing up houses ever since. A dozen in all.
At first, I did the fixing-up work myself. But I quickly learned that guys who do remodels all day were way better at it than me. Today, my best tools on the constructive side are a broom and a checkbook, not necessarily in that order. On the destructive side, well, I’m quite accomplished with a wrecking bar. Call me Mr. Tear-Out.
As investments, my houses have ranged from neutral to fantastic. But the real deal was about owning a home. Eventually without a mortgage.
So, I’m not sure I qualify as an objective observer on this topic. In my heart, I am a homeowner.
But the data says most of us are “over-weighted” in home equity
But something jumped out when I did the data grinding for my recent update of the Wealth Scoreboard. For most Americans, homeownership is the primary source of net worth. Without it, our net worth is small. With it, our net worth is larger and better.
You can get a sense of this by examining the distribution of net worth with and without home equity for households in the age 55 to 59 age range – those on the runway to retirement. (See chart below.)
American Household Home Equity and Net Worth |
||||||
| This table shows the proportion of household net worth by total net worth level for U.S. households at ages 55 to 59, pre-retirement. Households must be well above the median net worth level to have enough in earning assets to support their homes in retirement. All figures in thousands. | ||||||
| Top 1% | Top 5% | Top 10% | Top 25% | Top 35% | Median | |
| With Home equity | $17,546 | $4,794 | $2,506 | $645 | $357.3 | $193.5 |
| less Home equity | 16,328 | 3,770 | 1,948 | 412 | 183.7 | 58.7 |
| Home equity | 1.218 | 1,024 | 558 | 233 | 173.6 | 134.8 |
| % home equity | 6.9% | 21.4% | 22.3% | 36.1% | 48.6% | 69.7% |
| https://dqydj.com/net-worth-by-age-calculator-united-states/ | ||||||
As you would expect, home equity is a small part of net worth for the top 1 percent. With an all-inclusive net worth of at least $17.5 million, their net worth, less home equity, is $16.3 million.
Their $1.2 million in home equity could be a single home owned outright. It could also be two heavily mortgaged homes worth far more. Either way, the important fact is that only 6.9 percent of their net worth is in home equity. The remainder is in assets that earn returns (see table below).
They can afford the houses they own. And then some.
Lower on the wealth pyramid, its all about home equity
But as you go down the wealth pyramid, home equity becomes a greater and greater portion of net worth. It’s 21.4 percent of net worth for the top 5 percent households. It’s 22.3 percent for the top 10 percent of households.
At the top 35 percent, home equity is nearly half of net worth, 48.6 percent.
For the 65 percent of all households below that, home equity is greater than 50 percent of net worth — or they aren’t homeowners.
So? Is this a problem?
It is. Homes are wonderful places. They put a roof over our heads. But even if you own your home without a mortgage, it costs money. While estimates vary by location, most homes will cost about 4 to 5 percent of their value per year to operate.
Now let’s ask an awkward question. How much do you need in investment savings to provide the income needed to support your house?
Answer: It takes about a dollar of investment money to support a dollar of home value.
What the Federal Reserve consumer finances study tells us is that at least two out of three households don’t have enough in financial assets to support the amount of home equity they have when they retire.
If they have a remaining mortgage balance, the situation is worse. The only good news here is that the situation hasn’t changed greatly in the 50 years I’ve been observing it. Basically, 65 to 70 percent of all households have held most of their net worth in home equity for decades.
That was then, this is now
What’s the problem if the situation hasn’t changed?
Everything else.
Half a century ago, 401(k) plans didn’t exist. But pensions did. Today, pensions are an endangered species on two fronts. If they aren’t gone altogether, there is a good chance they are underfunded. As a result, most future retirees won’t have the virtual wealth of pensions to help pay shelter expenses. Most future retirees will be entering retirement with fewer income sources than past workers have had.
This observation goes way beyond arid statistics.
The most common retirement problem readers have is being “house-poor”—they love their valuable house, but don’t have the retirement income to support it.
For many, today would be a good time to think about downsizing.
Related columns:
Scott Burns, “The 2020 Wealth Scoreboard and Social Security,” 10/31/2020, https://scottburns.com/the-2020-wealth-scoreboard-and-social-security/
Scott Burns, “Finding the Top of Upscale,” 7/8/2020, https://scottburns.com/finding-the-top-of-up-scale/
Sources and References:
The dqydj (Don’t Quit Your Day Job) website net worth calculator: https://dqydj.com/net-worth-by-age-calculator-united-states/
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns, 2004 (Airstream in Santa Fe, NM)
(c) Scott Burns, 2020
4 thoughts on “Is Home Ownership Bigger Than It Should Be?”
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Scott, Re: Is Home Ownership Bigger Than It Should Be?
14 Nov 2020
Dear Scott Burns, Re your article: Is Home Ownership Bigger Than It Should Be?
First, I am a decades-long fan of your straightforward financial insights. THANK YOU.
I am retired and own a mortgage-free home in Bryan Texas. It is > 3600 sq ft w 4 bed, 2 bath, large living, large dining, large custom eat-in kitchen, entertainment room, large study and 2 car attached garage. It would probably sell for its tax valuation of ~ $300k. If it were in College Station, 4 to 6 miles south, it would probably have a tax appraisal of $750k. A 1600 sq ft home in B-CS would cost as much or more than I could net by selling my home. Further, my taxes are partially frozen on my present home but I understand they would step up if I purchased a new home of similar or higher value. I find that 1600 sq ft rentals in good neighborhoods that I have checked on in Bryan, El Lago, Seabrook, San Antonio and Vermont would cost more than it costs me to stay put and maintain my oversized home.
Life Care communities are attractive as a life style and for the confidence they offer re unforeseen medical issues. I have checked several in Texas and Florida including facilities in three categories: for profit, church-related and non-profit. The costs for a couple are $350k to $400k entry fee + $3k to $4k per month for nominal 1500 sq ft 2 bed, 2 bath w study. The monthly fees are adjusted incrementally for inflation.
The only way I have found that I could live less expensively would be to buy a nice cruising motor-sailer and spend most of my time in an upscale marina in a low tax jurisdiction. OR, perhaps a live-aboad RV. Those represent REALLY serious downsizing!
I would love to see you write a follow up article that looks closely at how one reduces living expenses by downsizing or by renting in retirement. The problem I see with renting is rent tends to increase in response to inflation at a faster rate than my taxes and utilities, but maybe that is because I live in the TAMU university community.
Please check my answer above. I agree that downsizing is NOT a no-brainer. But it’s also self-defeating to say that you want to down-size by moving to an area that costs nearly double the area you want to down-size from. If you play this situation in reverse — moving from B-CS to a further out area — you’d get to buy a smaller house at a lower cost per square foot. As a result you’d likely have lower real estate taxes, etc. As I said in another response, it’s all about the research you do and the particular numbers.
Here’s a positive and personal local example. My wife and I sold our house in Dripping Springs and moved to Johnson City. We moved from 1 acre to 22 acres, away from traffic and to a tax bill that is a quarter of our previous tax bill because we’re in a rural county. The only thing we gave up is a pool and, trust me, there comes a time when you get really tired of pool maintenance. (Yes, I know, definitely a first-world problem…)
Where is my thinking wrong? If I sell a $350K home with 3K square feet of livable space and move into a two bedroom two bath new apartment complex, my monthly housing expense also goes up. I do have the equity from the house, but my rough math tells me I can pay for possibly 16 years of rent. My current goal is to live another 30-40 years. 🤗 Maybe some folks live in high dollar housing areas, but I can’t see the math working in my favor on downsizing.
If I move to a $200K home, then I have to either really move far away or buy a 40+ year old home with its issues.
Lots of older people here are staying put, but some moving to be near their kids, etc.
I guess it boils down to having the income to support the 4-5% cost of ownership. The USA has a wide variety of housing costs.
The way I’ve seen this work most is when someone sells a house in a high value state and moves to a lower value state. For example, a move from Massachusetts to Florida. It’s a lot more difficult to do as a local change. Another blockage is that while housing values have risen substantially, rents have risen even faster. It’s a big decision that requires a lot of searching.