Regular People Struggle, Homeowners Included

Last year, Jerome Powell referred to “regular economic people” while editorializing around the plight of average Americans.

To his credit, Powell sometimes seems to have a better conception of who those people actually are and their circumstances than the rest of us.

Too often, we inadvertently pretend as though “regular” Americans can generally be described as affluent homeowners with six- and seven-figure retirement accounts, a spare $100,000 sitting around, five-figure checking accounts and two cars, at least one of which is a low-end luxury vehicle. In other words: Too often, financial commentators (distinct from financial journalists) extrapolate their own circumstances and those of their neighbors when they generalize about 330 million people.

Those commentators (and their neighbors) aren’t regular people. Regular people struggle. The reason periodic surveys routinely show a sizable share of Americans couldn’t fund a $500 emergency with cash is simple: A sizable share of Americans don’t have $500 to spare.

Relatedly, it’s amusing (in a sad kind of way) to see well-to-do contributors to financial media outlets mischaracterize homeownership in America as somehow indicative of relative “richness.” While it’s absolutely true that for the vast majority of people, the lion’s share of any wealth they’re able to accumulate will be home equity, a $200,000 home equity cushion (or even owning a modest home outright) doesn’t everywhere and always equate to financial security.

Imagine, for example, a family of five (a husband, wife and three kids) with $150,000 in home equity, but only a modest household income. That family isn’t rich. In fact, they might be more or less poor depending on how old the children are, what needs those children have and how “modest” their income is. The idea that such a family has $150,000 in “wealth” isn’t much different from saying someone who just finished paying off a Honda Accord has $10,000 in “cash.” It’s true in theory, but depending on the circumstances, it could be a completely absurd claim.

I often joke (darkly) about how ridiculous it is to suggest that American “households” are $38 trillion richer than they were pre-pandemic, which is what a naive interpretation of the Fed’s household wealth data would suggest.

$10.5 trillion of that windfall came from stocks, which are disproportionately concentrated in the hands of the rich. Lower-income Americans own no stocks to speak of.

$15.5 trillion is in real estate, though, and as one Bloomberg Opinion columnist was keen to suggest on Tuesday, property in America is (and try not to laugh) a more egalitarian asset than stocks. “Unlike stocks, which are held primarily by the wealthy, home equity is a middle-class phenomenon with two-thirds of American households owning their homes,” the linked piece happily declared.

First of all, home equity means different things to different people depending on their circumstances. It doesn’t everywhere and always equate to a sense of financial stability and well-being, although it certainly doesn’t hurt.

Regular readers know I like anecdotes and real-world examples. I spoke just this week to a young lady who used a modest inheritance to make a downpayment on a home in early 2021. She locked at a very low rate and benefited from (based on her retelling, which was plausible given local property values) around $60,000 in price appreciation within 12 months.

During that same period, she had her first child. And she’s a single mother. Between the downpayment and the on-paper windfall from the price gains, she has more than $150,000 in home equity. But guess what? Because her income is modest and she’s a new mom, her number one concern (by her own account) is money. I suppose I should’ve patiently explained that in fact, she was wealthy!

Zooming out to the 30,000-foot level, there are distributional issues with housing wealth just like there are with equities. Indeed, the distribution changed dramatically from 2010 to 2020, according to the NAR.

The figure above is the most effective way to illustrate the point, and it’s sobering enough as shown, but note the implication: High-income homeowners accounted for almost three-quarters of the increase in value of owner-occupied housing from 2010 through 2020.

“Unfortunately… the distribution of housing wealth has worsened in the past decade, with low- and middle-income households sharing less of the housing-wealth pie,” the NAR wrote, describing the results of their study. “Of this total increase in aggregate housing value, high-income homeowners accounted for 71% of the increase, middle-income homeowners accounted for 26% and low-income homeowners accounted for 4% of the increase.”

Maybe that trend has reversed following the pandemic, maybe it’s worsened. I don’t know. The NAR study was published in 2022. But it scarcely matters for our purposes here. My point is that just because a lot of families own homes doesn’t mean home equity gains are an egalitarian phenomenon.

Consider this question: If every man, woman and child in America owns one share of stock, is equity ownership “universal”? Yes. But also no. And that’s anyway not what’s happening in housing. According to the same NAR study, the only income group which saw an increase in homeowner households from 2010 to 2020 was high earners. As a share of all homeowners, low-income buyers fell more than 10ppt. The middle-class’s share was basically unchanged. High-income buyers’ share damn near doubled.

The figure below (which the Bloomberg Opinion piece references) shows that household wealth, expressed as a multiple of disposable personal income, is still very elevated.

In part, that’s a function of the dramatic increase in home equity, and the idea is that it should support consumer spending going forward.

It’s certainly true that the vaunted “wealth effect” from rising home and equity prices is part and parcel of consumer resilience in the US. No one writing daily for the public is more adamant about that than I am. And to be completely fair, the article I’m referring to wasn’t meant as a comment on equality nor did the author have any obvious pretensions to socioeconomic profundity. So, I’ve admittedly made a mountain of a mole hill with the above.

But I think we should be extremely careful (not just a little careful) about suggesting that wealth aggregates are somehow indicative of better financial outcomes for everyday people — even when, as is the case with home equity, the asset in question is a little bit more egalitarian than stocks.

Coming full circle, regular people struggle. And most people are regular. If you’re not struggling, you’re the exception, not the rule. Don’t forget that. Particularly if you’re writing for the public.


This site uses Akismet to reduce spam. Learn how your comment data is processed.

15 thoughts on “Regular People Struggle, Homeowners Included

  1. Hold on, though.

    Could that single mother (and, yeah, btw, stupid life choice guaranteed to make her life harder unless the father is financially supportive beyond legal minimums, if any) not access her house equity via reverse mortgage etc etc?

    Once the money’s spent, the money’s spent but it is/was there.

    Related question – did wealthy household see their home equity improve b/c they paid down the debt? b/c they own the homes in areas that gained in value? b/c they’ve invested more heavily into buy-to-rent? Just curious about composition effect…

    1. You’re not in a position to judge the life choices of people you don’t know. I guarantee there are things about your life that I think you should change, and I guarantee you aren’t interested in hearing my opinion about them. This young lady doubtlessly doesn’t care about your opinion of her child, and if you were in the same room with her, my guess is you’d keep your opinion to yourself. So, keep it to yourself here too.

      1. I can be without social tact in person too… 🙂

        … but I wouldn’t call it judgemental. If you want my deeper take, it’s not about morality, it’s about practicality. 2 people is barely enough to raise a kid in this fallen world. 3 or 4 would be better, which is why I think polyamory could make a play to supplant traditional marriage as the superior family arrangment.

        Single parent is objectively harder. If this young lady has decided that the hardship is worth it, that’s fine and, as you say, it’s no skin off my nose so who cares about my opinion? Not even me.

        But maths is maths.

        1. Yes, “maths is maths,” so I assume you’re aware (and this touches on the question from your first comment, which I just noticed) that there’s “maths” behind HELOCs. The bank doesn’t just pile up your home equity in hundred dollar bills in a safety deposit box that you’re free to come pluck out of at your leisure. It’s not free money.

          Now please, for the sake of your sanity and mine, let’s just drop this, because I don’t have time to explain to you why using a home as an ATM (or, more aptly, as a credit card) is a suboptimal option if you don’t understand it, and I certainly don’t have time to debate the merits of a society-wide shift to a literal “it takes a village” approach to child-rearing.

          1. No problems, I am genuinely not aware of how HELOCs etc work in the US since I am not American but I am not posting here to create problems or give you trouble.

            I’d still be interested to know if we got data on how the higher earners manage to accumulate more and more of the housing wealth.

  2. H: Does your discussion of the distribution of equity market and home value gains imply a higher probability of a Wile E. Coyote moment for consumers and a significant recession ahead? I think it does, but that ‘wealth effect’ seems to have kept things chugging along. I’m wondering how long it can last.

    1. Is it not the reverse to a large extent? If the wealth effect really only apply to the people with a lower propension to consumption, then it can’t have been that big of a factor for spending till now and therefore won’t decide on the future of spending either…

      Interesting questions – do we have a lot of data breaking down the evolution of consumption for people in the 20 to 80 percentiles of income distribution? Both relatively and absolutely.

  3. Jackson County, MO, home of Kansas City, shot itself in the foot this by hiring an outside contractor to provide assessments for the county’s real estate property tax “partners.” To make the story simple this company seems to have messed up and created a crazy firestorm which has resulted in 45,000 outraged citizens demanding a redo on their reported residential values. Me, I’m happy mine went down for the second year in a row, but I have read many hundreds of entries on a couple of neighborhood chat boards and the “economically ordinary citizens” are deeply pissed. Part of the reason for this is that for political reasons (perhaps) the county has been sloppy about home values for over a decade and people have been happy to believe that for tax purposes their home isn’t worth much. In fact, in a great many cases that is just not so. The homes of many of the 20% of the ordinaries who live in a family owned home should have been paying much higher taxes and now the chickens have come home to roost. Part of having wealth based on home ownership is that it gets taxed every year. I have owned my home for 14 years and during that time I have shelled out close to 20% of my home’s value for property taxes. I can afford it, but from what I read in the chat rooms, a great many could lose their homes in this debacle. I live in a KC suburb which is actually the sixth largest city in the state and they have just sued the country to try to stop this year’s assessments from sticking. Since mine is down, as will be my taxes, I’d rather the suit fails. A lot of my ordinary neighbors don’t agree and will suffer.

  4. Home equity might be the most illiquid asset a person can own. Given that a home is financed for a generation and that equity appears as soon as home values appreciate, a person has wealth on paper quite quickly. How do you get access to that wealth? Well you can sell your home and receive the difference in buying and selling price but then where do you live and put your crap? That money will then likely go to your next landlord if not your next home purchase. You can borrow against your home equity for, at this point, a not insignificant rate. But now your debt increases with your home equity and you have to make payments monthly on that debt. If you have any kind of negative change in income, now you are having to figure out how to make payments on the equity you borrowed against as well as your mortgage. If home prices then drop below your total debt burden, well then you’re just going to have to foreclose the whole thing and now you go from being wealthy to being homeless. Home equity is imaginary wealth that artificially makes poor people feel rich and spend money they don’t actually have and can’t afford to borrow until they are forced to reconcile the fact that they were never really rich but are now poorer.

    1. I think the Street calculations of wealth growth should distinguish between total and liquid wealth.

      Imagine an upper-middle class household with after-tax income $100K/yr, total expenses $80K/yr, house worth $600K of which $300K equity net of $300K debt, retirement accounts $500K, and $50K cash savings. The income, expense, and cash savings are liquid; the house and retirement accounts are illiquid (effectively).

      Suppose from year 1 to year 2 income inflates +7%/yr (+$7K/yr), expenses +7%/yr (+$6K/yr), house value +10%/yr ($60K/yr), retirement accounts +10%/yr (+50K/yr), and interest income on cash savings rises from +zero%/yr (+$0K/yr) to 4%/yr (+$2K/yr). Pretty strong year?

      From year 1 to year 2 their total wealth on paper increases +$113K/yr ( = $7K – $6K +$60K + $50K + $2K), yes that looks great. But their liquid wealth only increases +$3K/yr ( = $7K – $6K + $4K). If they have any variable rate debt (HELOC on house, get a new car loan, credit cards) their liquid wealth increase may be nil, even negative.

      Run that scenario for a lower-middle class household (lower income and expense, rent not own, less cash savings) and it looks worse. For a low income household (even lower income, expense equal to income, rent, almost no cash savings), even worse.

NEWSROOM crewneck & prints