In previous posts, we discussed the importance of home equity and the ways in which homeowners can tap into the equity to build wealth and cover expenses. The amount of home equity in the U.S. is staggering. Residential real estate is the largest asset class in the U.S., totaling $43.4 trillion according to a Zillow Analysis.
Of the total residential market, there is roughly $15 trillion in mortgage debt outstanding as show below:
The total equity in the market is equal to the difference between the value of the real estate minus the mortgage debt outstanding on that property, implying equity value of roughly $28 trillion. This consistent with the reported $27.8 trillion in equity value from June 2022 according a WSJ article.
However, according to mortgage-data firm Black Knight, of that $27.8 trillion, roughly 60% was withdrawn from the market via cash-out refinances by the end of 2021. This leaves roughly $11 trillion in “tappable” home equity remaining for U.S. homeowners.
There are roughly 80 million homeowners in the U.S., however about 40% of those homeowners own their house in full (they no mortgage outstanding), meaning only 60% have a mortgage, or roughly 48 million Americans. According to Black Knight, the average amount of tappable home equity among the roughly 48 million homeowners is $207,000.
The $207,000 per household is a major asset class that is underutilized by households. As a comparison, according to Vanguard’s 2021 report, the average 401k balance is $141,542. Meaning homeowners have almost 50% more wealth tied up in their homes than in the retirement accounts, on average.
According to the 2019 survey of consumer finances, the largest assets for U.S. households are as follows:
Despite home equity being the largest asset for U.S. households, it is underutilized and not well understood. By tapping into this home equity, through HELOANs or HELOCs, households can improve their financial well-being. For example, household assets such as: retirement accounts, stocks & bonds, and other financial assets, are all methodically invested and typically generate good returns which further grows their wealth. Although home equity will increase with broader home prices, it is not actively invested and does not grow very quickly.
The annualized return of home prices from 1963 to 2022 was 5.6%, while the average annual inflation rate over the same period was 3.9%, meaning home values increased 1.7% on an annualized inflation-adjusted basis.
Although home prices do generate positive inflation-adjusted returns over time, there are many other ways to grow wealth at a faster pace over time. Conversely, home equity can be used to pay down high-cost debt that typically has annual interest rates well above 10%. A homeowner would be better suited to tap into their equity to invest it into higher returning assets or pay down costly debt.
Tapping into home equity may seem complex to many homeowners. and the concept of taking out a loan against your home can seem daunting. However, the benefits from tapping into home equity should be well understood by homeowners.
In our next blog post, we will cover ways in which home equity can be put to good use and increase wealth for homeowners.