Average Home Equity: For Some Americans, Wealth Is in the Home

Editor's Note: This story originally appeared on NewRetirement.

Even with home prices falling over the last year in many locations, home prices remain high.

And, if you have owned a house for more than three years, you have probably seen measurable appreciation.

Let’s explore a bit about home equity and why it is so important if you are anything but a member of the upper class.

What Is Home Equity?

Home equity is the difference between your home’s market value and the amount you owe on your mortgage.

Home equity plays a significant role in wealth gains for many middle-class and lower-income individuals and families. It represents a form of forced savings as homeowners pay down their mortgages.

Average Home Equity

According to the latest data from real estate data firm CoreLogic, the average U.S. homeowner now has more than $274,000 in equity — which is down from last year, but still a historically high average.

And, the National Association of Realtors, the median price of a house in the United States is $190,000 more than it was a decade ago.

Average Home Equity by Income Level

In the realm of wealth and prosperity, disparities loom large. While the chasm between the investable assets of the very rich and the majority of the population is vast, there is somewhat less of a divide on home equity.

Among income groups, low-income households typically own a home with a value that is $65,000 lower than the value of homes owned by middle-income households. However, low-income owners spend more years in their properties, with an average length of homeownership in 2021 of 19 years compared with 16 years for middle-income and 14 years for upper-income households.

Median home value by income level:

• Low-income: $209,920
• Middle-income: $274,420
• Upper-income: $405,160

The Disparities in Home Equity Are Much Smaller Than the Differences in Stock Holdings

According to data from the Federal Reserve, compiled by Ben Carlson of the site A Wealth of Common Sense, the disparities in home equity are vastly smaller than the differences in stock holdings by household wealth.

The top 1% of household wealth own 54% of stocks, but only 14% of the home equity, and the bottom 50% have 0.6% of stocks but 13.1% of home equity.

In Q4 2021 (the latest data available):

• The top 1% had $22.9 trillion in stocks, representing 53.9%, and $5.3 trillion in home equity, representing 13.8%.
• The 90%-99% had $14.9 trillion in stocks, representing 35%, and $11.7 trillion in home equity, representing 30.7%.
• The 50%-90% had $4.5 trillion in stocks, representing 10.5%, and $16.2 trillion in home equity, representing 42.4%.
• The bottom 50% had $300 billion in stocks, representing 0.6%, and $5 trillion in home equity representing 13.1%.

Pros and Cons of Having Wealth Concentrated in Your Home

While home equity can be a valuable source of long-term wealth, it’s essential to strike a balance between homeownership and diversifying your investments to mitigate risks and ensure a well-rounded financial strategy.

Home equity is a valuable source of wealth that can be tapped in a variety of ways to help with retirement or other financial goals. However, home equity is not the most flexible source of wealth. There are downsides to relying on home equity, including:

• Liquidity: With home equity as an illiquid asset, converting home equity into cash can be a convoluted and sometimes expensive process.
• Maintenance and costs: Homeownership comes with ongoing expenses, including property taxes, homeowners insurance, maintenance, repairs, and utilities. These costs can be substantial and impact your overall financial situation.
• Market risk: The value of your home is subject to market fluctuations. While real estate can appreciate, it can also depreciate, especially in economic downturns or in areas with declining property values.

The bottom line, though, is that wealth in the form of home equity is much better than no wealth at all.

How To Tap Home Equity for Retirement or Other Purposes

You have lots of options for how and why to tap your home equity. And, any of the following options can be modeled as a “what if” scenario in the NewRetirement Planner.

Let’s start with why you might want to tap home equity, then explore how.

Why tap home equity?

Tapping into home equity refers to using the value you’ve built up in your home to access funds for various purposes. Homeowners may choose to do this for several reasons, depending on their financial needs and goals. Here are some common reasons why people tap into home equity:

• Home improvements and renovations (which may increase the value of your home equity)
• Debt consolidation, which can reduce the lifetime cost of servicing your debt
• Funding a one-time cost like a vacation, education, or an unforeseen emergency expense
• Retirement income (some retirees tap home equity so that they can spend more in retirement or retire earlier)
• A long-term care or longevity hedge (other retirees opt to retain their home equity and only tap into it if needed to fund long-term care or a longer life than anticipated)
• Inheritance (many people hope to retain the value of their home as a way to pass on wealth to the next generation)

How to tap home equity

Options for accessing home equity include:

• Downsizing (trading your existing home for something less expensive which can eliminate mortgage payments and improve cash flow and/or release home equity)
• Securing a home equity loan
• Renting out a room, part, or all of your home
• Getting a reverse mortgage
• Cashing out and renting