Economist's Commentary: April 7, 2008
Wealth Accumulation for Homeowners
By Danielle Hale, Research Economist
How has the wealth of current homeowners changed as a result of home ownership? One way to answer that question is to create a snapshot of the equity individuals who purchased a home at the median price 5, 10, 15, and 20 years ago would have built up if they had kept that home through 2007. We did that for 154 metropolitan statistical areas (MSAs), and the findings yield some expected and unexpected results.
Unsurprisingly, the areas featured in the news for having recent big gains have also shown considerable gains over the long term. The top five performers over the period from 1987 to 2007 were all out west, in California and Hawaii, and the amount of equity those home owners have accumulated is between $490,000 and almost $690,000 (see Table 1).
What may be surprising to some is that areas that have recently been in the news for poor performance on prices-namely MSAs in industrial states known as the "rust-belt," such as Michigan, Ohio, Pennsylvania and Indiana-have still been vehicles for a considerable accumulation of equity over longer periods of time (see Table 2). Those who purchased homes in these areas in 1997 have accumulated equity between $20,000 and almost $50,000, and for homes held for a 20 year period, accumulated equity is between almost $48,000 and $98,000.
While there is significant variation by area, both the mean and median values for the MSAs studied suggest that considerable equity can be built up over time for individuals who purchase and keep their homes (see Table 3).
Of course, these calculations required a few assumptions, so here's the full disclosure.
- I assume that homeowners had 100 percent financing for the purchase price of the home (i.e. did not make any down payment). This would tend to underestimate the amount of equity earlier home purchasers have accumulated; in 2003 39 percent of first-time home buyers put 10 percent or more money down up front. (Recent market trends make this assumption more reasonable. For example, in 2007, 45 percent of first-time home buyers financed 100 percent of the home purchase price).
- I also assume that homeowners have not tapped into any of the equity in a home with lines of credit. This is likely to overstate the amount of equity currently available to home owners, but does not affect the consideration of how much equity could have been built up.
- Finally, I assume that home buyers financed with a 30-year fixed rate mortgage, that the loan was fully amortized (they pay principle and interest over the 30-year period), and that home buyers did not refinance since the initial purchase. The first two of those assumptions do not mirror reality in more recent years and may lead the calculations to overestimate equity in a home, but since the real explosion in sub-prime lending occurred in 2003, the assumption is reasonable over previous periods. The last of the assumptions works in the opposite direction-it likely leads to an underestimation of home owner equity. Buyers likely took advantage of the opportunity to refinance when mortgage rates were under 6 percent in 2003-2005. Particularly for refinancers, who were previously paying much higher interest rates of as much as 10.2 percent for those who purchased in 1987 (see Table 4), the calculations here will underestimate the equity in their homes.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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