April 9, 2009

By Danielle Hale, Research Economist

The Federal Reserve's Survey of Consumer Finances, conducted once every three years, provides snapshots of family income and net worth along with basic demographic details and more detailed information on how families store wealth they have. The most recent survey, concluded in 2007, offers a picture of the situation before home price declines and the tumbling equities market hit household balance sheets. At that time, median homeowners had well over $200,000 in net worth compared to median renters who had just over $5,000. In the research paper accompanying the survey results, Fed researchers conducted a thought experiment to determine how market declines might have impacted the mean and median households through October 2008. Looking at aggregate data, the National Association of Realtors® estimated the impact for renter and homeowner households through calendar year 2008. The result, shown below in Chart 1, suggests that despite declines in equity and housing markets, homeowners still have a net worth orders of magnitude greater than renters in 2008.

Chart 1

Homeowners store wealth in a variety of places, but chief among the options is their primary residence. 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 2008. This is the second year we have performed this experiment for more than 150 metropolitan statistical areas (MSAs), and the findings yield some expected and unexpected results.

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 accumulated was between $490,000 and almost $690,000 (see Table 1[2007]). For 2008, the top three performers over 1988 to 2008 were the same albeit in a slightly different order (see Table 1[2008]). New York areas rounded out the rest of the top 6. The 20-year gains in 2008 were on the order of $318,500 to $485,300. While these gains are $150,000 -$250,000 less than last year's estimated gains, they are still sizable.

Table 1 [2007]
Location	5 year	10 year	15 year	20 year
San Francisco-Oakland-Fremont,  CA	$  322,171	$  557,835	$  605,668	$  689,298
Anaheim-Santa Ana,  CA	$  313,933	$  500,821	$  521,743	$  591,085
Honolulu,  HI	$  330,443	$  377,942	$  374,674	$  521,288
San Diego-Carlsbad-San Marcos,  CA	$  248,356	$  428,500	$  447,663	$  503,809
Los Angeles-Long Beach-Santa Ana,  CA	$  318,196	$  436,526	$  426,826	$  493,509
Data from: NAR/FHFA /Haver 2007

 

Table 1 [2008]
Location	5 year	10 year	15 year	20 year
Honolulu,  HI	$  271,865	$ 370,788	$ 357,672	$ 485,255
San Francisco-Oakland-Fremont, CA	$  104,825	$ 347,730	$ 433,008	$ 481,339
Anaheim-Santa Ana, CA	$  81,911	$ 310,084	$ 371,843	$ 403,106
New York-Wayne-White Plains, NY-NJ	$  134,400	$ 314,006	$ 354,676	$ 359,617
Nassau-Suffolk, NY	$  97,629	$ 285,860	$ 317,131	$ 321,170
NY-N New Jersey-Long Island, NY-NJ-PA	$  119,189	$ 280,969	$ 311,951	$ 318,490
Data from: NAR/FHFA /Haver 2008

 

Recently poor performance-in this case, equity performance over the past five years-was still subpar and actually worsened in MSAs in industrial states such as Michigan, Ohio, Pennsylvania and Indiana, sometimes referred to as the "rust-belt" (see Table 2[2007] and Table 2[2008]). A handful of boom and bust areas are also on this list of bottom performers over the five year period. As was previously the case, most of these MSAs have still been vehicles for accumulation of equity over longer periods of time. In 2008, homes in these areas held for 10 years accumulated anywhere between a loss of $4,000 and a gain of $15,000. Over 20 years, all of these areas show gains ranging from $30,000 to $284,000. However, the pattern of equity accumulation is different for those in the boom and bust areas versus the rust-belt areas. In the boom and bust areas, those who purchased homes in 1998 accumulated a substantial amount of equity in the boom, and the bust has not wiped out all of their gains from appreciation. Rust-belt MSAs have seen a relatively steady decline over time without a preceding run-up-a pattern driven by persistent adverse economic conditions.

Table 2 [2007] - Recently declining markets have still enabled equity building over longer time horizons
Location	5year	10year	15year	20year
Detroit-Warren-Livonia,  MI	$(15,788)*	$36,845	$77,677	$98,298
Youngstown-Warren-Boardman,  OH-PA	$1,306	$14,976	$34,532	$48,281
Toledo,  OH	$4,179	$31,085	$51,525	$69,608
South Bend-Mishawaka,  IN	$5,661	$23,143	$42,250	$60,870
Ft. Wayne,  IN	$8,416	$22,882	$41,875	$54,653
Canton-Massillon,  OH	$8,440	$28,730	$55,533	$75,337
Lansing-E. Lansing,  MI	$8,679	$49,295	$72,958	$90,991
Dayton,  OH	$10,376	$31,954	$53,054	$75,397
Saginaw-Saginaw Township North,  MI	$11,095	$20,425	$38,390	$54,044
Cleveland-Elyria-Mentor,  OH	$11,231	$28,967	$60,136	$85,255
*Data for Detroit were spotty and required interpolating NAR data with OFHEO data.  This may have distorted the 5 year  equity projection

 

Table 2  [2008]- Recently declining markets have still enabled equity building over longer time horizons
Location	5 year	10 year	15 year	20 year
Detroit-Warren-Livonia,  MI	$        (38,574)	$      10,386	$    59,547	$    78,175
Lansing-E. Lansing,  MI	$        (26,103)	$      12,273	$    43,320	$    60,305
Grand Rapids,  MI	$        (19,475)	$      15,473	$    44,069	$    62,646
Canton-Massillon,  OH	$        (13,511)	$        5,760	$    36,486	$    55,986
Cleveland-Elyria-Mentor,  OH	$        (13,373)	$        4,658	$    37,925	$    62,780
Toledo,  OH	$        (13,050)	$      10,633	$    37,489	$    52,616
Sacramento-Ardn-Arcade-Roseville,  CA	$        (12,744)	$   109,618	$  120,718	$  152,465
Saginaw-Saginaw Township North,  MI	$        (11,422)	$      (4,385)	$    18,889	$    32,932
San Diego-Carlsbad-San Marcos,  CA	$          (8,142)	$   209,034	$  254,182	$  284,250
Youngstown-Warren-Boardman,  OH-PA	$          (7,716)	$        5,456	$    26,235	$    40,714
Akron,  OH	$          (7,642)	$      10,043	$    38,691	$    60,925
Memphis,  TN-MS-AR	$          (4,689)	$      25,688	$    54,668	$    68,889
Denver-Aurora,  CO	$          (1,433)	$      89,540	$  141,519	$  162,714
Indianapolis,  IN	$          (1,020)	$      18,782	$    46,865	$    67,529
* Data for Detroit were spotty and required interpolating NAR data with OFHEO data.  This may have distorted the 5 year equity projection

 

Table 3 shows the mean and median values for 154 areas surveyed in 2007 and 2008. Price declines have impacted the home equity of recent buyers more substantially than previous buyers, but mean and median housing equity for buyers is still orders of magnitude greater than the wealth of the median renter.

Table3
	5year	10year	15year	20year
2007
154 Areas Mean	$71,954	$114,871	$138,585	$161,241
154 Areas Median	$48,601	$80,022	$103,334	$120,208
2008
154 Areas Mean	$41,628	$91,693	$119,103	$137,575
154 Areas Median	$34,846	$73,940	$94,660	$112,161
2007 to 2008
Change in Mean	-42.1%	-20.2%	-14.1%	-14.7%
Change in Median	-28.3%	-7.6%	-8.4%	-6.7%

 

Of course, these calculations required a few assumptions, so here's the full disclosure.

1. 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 upfront according to the National Association of Realtors® Home Buyer and Seller Survey. Recent market trends make this assumption more reasonable. For example, in 2007 and 2008, 45 and 34 percent of first-time home buyers, respectively, financed 100 percent of the home purchase price.
2. 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.
3. I assume that home buyers financed with a 30-year fixed rate mortgage, that the loan was fully amortized (buyers pay both principle and interest over the 30-year period), and that home buyers have not refinanced since the initial purchase. If buyers took out interest-only or balloon loans, the calculations overestimate equity in a home. The last assumption may lead to an underestimation of home owner equity if buyers took advantage of the opportunity to refinance. However, since mortgage rates were generally quite good over the period studied, this is probably less likely than it was in the 2007 study.
4. Finally, all equity gains are expressed in nominal dollars.

For more information on wealth gain for your metro area, click here > (requires log in)

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

Comments? Questions? E-mail NAR Research.

NAR members, learn how you can add this commentary to your Web site, blog, or newsletter. Read more >