Got Wealth? Deed Holding Beats Renting at Every Age, Federal Reserve Finds

Buying a home is expensive. But the investment in a deed can pay off as equity increases. Holding a deed is a pillar for household wealth-building, according to the Federal Reserve’s Survey of Consumer Finances.

It’s not surprising that the Fed has confirmed this. Yet it’s interesting to see how the U.S. central bank lays out the most recent numbers.

By the Numbers: A Decade of Equity-Building

The survey from the Federal Reserve is published every three years. Now, we have the results of the first survey of U.S. household finances that takes stock of our situation since the pandemic. Here’s the latest:

• Deed holders in nearly every part of the country have been accumulating significant levels of home equity.

• Overall, the typical U.S. homeowner has built up $232,000 in home equity over the past decade.

• Even in markets showing only modest gains, the typical deed holder has built well over $100,000 in home equity over the past decade.

Now, you may say that just shows how high the price of the typical home has climbed in the past 10 years. And that’s true. A deed holder’s rising home equity reflects price inflation in the real estate market. Home equity gains look good on paper, but a homeowner who sells will likely need that built-up equity to buy a home at the current market prices.

Then again, at least the deed holder does hold the equity, and that is power.

A renter who is just trying to buy a first home needs to get enough cash together from other sources.

Owner or Renter? At All Stages of Life, It’s a Wealth Question

The Fed gives us more numbers to help us draw conclusions and make comparisons:

• A typical deed-holding household has 38 times the wealth of the typical renter household. Plus, that huge wealth gap between deed holders and renters keeps widening.

• An analysis of the Fed figures, this time from the National Association of Home Builders, shows that deed holders’ median wealth stands at $151,000.

• Homeownership rates rise in middle age, and so does the median deed holder’s net worth—which reaches the half-million-dollar mark near retirement age.

• In contrast, the median renter household’s wealth stands at about $10,000, peaks at $13,000 in middle age, then returns to the $10,000 mark near retirement age.

The dynamic behind these figures is fairly well known. Renters get shelter, but don’t get a stake in the value or the appreciation of the property over the months and years of paying rent.

How It’s Going: The Economic Well-Being of U.S. Households Report

The Federal Reserve—that is, the U.S. central bank—published another report last year on the Economic Well-Being of U.S. Households. According to the Fed’s report, housing represents the largest expense for most of us. Those who rent, rather than own, usually do so because of financial limitations. (Finances aren’t the only reason people rent—although most renters surveyed say they’d rather own if they could afford it.)

The Fed finds:

• Housing costs are outpacing incomes, making it harder for young adults to afford homes today.

• The most frequently mentioned reason for not buying is the difficulty of gathering funds for a down payment.

• Black and Hispanic households and adults with disabilities tend to have lower homeownership rates.

About two-thirds of adults who own their homes have mortgages. The typical monthly mortgage payment is $1,500. But that varies widely. Housing costs are higher in the Northeast and in the West Coast states, and lower in the Sun Belt and Midwestern states.  

Surprise: Fewer People Actually Own Their Homes Than Everyone Thought

There’s one more figure that we must note. According to new research from the Federal Reserve Bank of Minneapolis, just 53% of U.S. adults hold the deeds to their homes. That’s far fewer than the frequently cited 65% homeownership rate.

So…

It’s not true that about two-thirds of U.S. adults own their homes. It’s actually just over half.

What happened to make the reality so different? What was amiss with the 65% rate, which was based on U.S. Census data?

The Minneapolis Fed didn’t just look at the share of owner-occupied homes, as the Census figures do. It looked at the homeowners-to-population ratio (“HPOP”). This is the actual percentage of adults who hold deeds.

The Census has been classifying households as “owner-occupied” even when some adults living there are not on the deed. But does that mean everyone in an owner-occupied household is a deed holder? Not so. More than one in eight U.S. adults lives with deed-holding relatives or friends but is not a deed holder, Minneapolis Fed researchers say.

So now we see more clearly how hard it really is to acquire a deed to a home in the United States. The new findings show that homeownership is lower than we realized in every U.S. state. We, as a country, must do better.

Renters Haven’t Built Up Home Equity—But What About Stock Market Gains?

Some renters have built up value over the years through retirement accounts. Can they shift those funds into down payments if they want to?

Current law lets first-time buyers withdraw up to $10,000 from individual retirement accounts to put money down on their homes without paying a 10% early withdrawal penalty.

A proposal in Congress, the Uplifting First Time Homebuyers Act, was introduced as a bipartisan bill last year. The bill would raise the penalty-free withdrawal limit to $50,000. But the bill hasn’t gained much traction so far.

The Urban Institute has published some findings that could support such legislation. Funding a down payment with 401(k) money “can be a winning proposition for millions of renters aspiring to buy their first home,” according to Urban Institute analysts, “especially if they remain active observers of market conditions and interest rate moves throughout their homeownership journey.”

The National Association of REALTORS® seems supportive of the idea, too. NAR analysts looked at the past decade of returns and found that a person who “dropped $50,000 into a house” did better than one who put the same amount, over the same time period, into S&P 500 stocks.

Our Takeaway: Deeds Continue to Make Wealth-Building Sense

U.S. law and policy could take all of the above into account to help first-time buyers. For our readers’ planning purposes, the above information backs the general view that a deed is worth seeking—perhaps more so today than ever.

Important note: Nothing in this article should be construed as financial advice. Pulling money out of a 401(k) or an IRA comes with financial risks. Speak with a professional adviser to weigh the potential benefits and pitfalls.