The Hazards of Concentrating Wealth in Homeownership

January 16, 2018
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Homeownership can be part of a financially sound household’s portfolio, but evidence suggests that it should constitute a limited share of assets.

That’s according to a recent Housing Market Perspectives article, which examined growth and volatility in housing wealth to answer the question: Is homeownership bad for wealth accumulation?

It was written by William Emmons, lead economist for the Federal Reserve Bank of St. Louis’ Center for Household Financial Stability.

A Double-Edged Sword

Emmons noted that house prices have risen significantly from their low point after the Great Recession, and that homeowners’ equity (HOE) has increased even more in percentage terms. According to Emmons, this is because leverage in the form of mortgage borrowing amplifies price gains, resulting in proportionately larger HOE wealth accumulation.

However, he called leverage as “double-edged sword,” because debt financing also magnifies house price declines—causing even steeper percentage losses in HOE.

“In fact,” he wrote, “long-term data suggest that debt-financed homeownership, when compared with other sources of wealth such as stocks, bonds and savings accounts, may not generate returns high enough to compensate for the higher risk.”1

Evidence Suggests Caution

Total HOE increased by $6.9 trillion between 2011 and 2016;2 adjusted for inflation, this gain was $6.4 trillion. Adjusted for changes in in the number of households, inflation-adjusted HOE increased by 12.5 percent annually during 2011-2016. This is compared to an average annualized increase of 4.4 percent for all other types of household wealth.

Aggregate Housing and Nonhousing Wealth
Total Amount (in Trillions) Average Amount Per Household (in Thousands) Compounded Average Annualized Change in Average Amount Per Household after Inflation* Standard Deviation of Annual Percent Change
2016 2016 1947-2011 2011-2016 1947-2016 1947-2016
Homeowners' Equity (HOE) $13.1 $104.4 0.5% 12.5% 1.4% 9.1%
All Other Household Wealth $79.0 $628.1 1.2% 4.4% 1.5% 4.9%
Total Household Wealth $92.2** $732.6** 1.1% 5.4% 1.5% 4.9%
* Continuously compounded average annualized changes for holding periods indicated, adjusted for inflation
** Totals are not exact due to rounding.
SOURCES: Federal Reserve Board Financial Accounts of the United States; U.S. Bureau of Labor Statistics.
Federal Reserve Bank of St. Louis

Emmons noted that these 12.5 percent and 4.4 percent increases for the period 2011-2016 are far greater than their respective annual averages over the longest prior period available, 1947-2011. Nonetheless, he pointed to three pieces of long-term evidence suggesting “caution in advocating homeownership as a primary means of wealth accumulation for many families:”

  1. HOE increased less than nonhousing wealth during the longest period of available data, 1947-2016.
  2. The volatility of HOE during this period far outstripped the volatility of nonhousing wealth.
  3. Housing wealth is especially volatile for black and Hispanic families.
Changes in Wealth by Race or Ethnicity
Average Annualized Change after Inflation* Average Three-Year Change after Inflation** Standard Deviation of Three-Year Change**
1989-2010 2010-2016 1989-2016 1989-2016 1989-2016
White Non-Hispanic 1.6% 2.0% 1.7% 5.0% 18.8%
Black 1.5% -0.3% 1.1% 3.3% 30.6%
Hispanic 0.6% 5.4% 1.7% 5.0% 41.5%
Asian or Other 1.9% 5.7% 2.7% 8.2% 22.2%
White Non-Hispanic 2.6% 5.0% 3.1% 9.3% 15.3%
Black 1.7% 8.5% 3.2% 9.7% 28.2%
Hispanic 2.6% 7.9% 3.8% 11.4% 25.2%
Asian or Other 3.4% 2.9% 3.3% 9.9% 19.7%
* Continuously compounded average annualized changes for holding periods indicated, adjusted for inflation
** Simple three-year average (standard deviation) calculated from all nine three-year periods between surveys
SOURCE: Federal Reserve Board Survey of Consumer Finances.
Federal Reserve Bank of St. Louis

Volatility and HOE

Regarding volatility, Emmons said that the estimates in the first table do not reflect the extra volatility experienced by a family holding an “undiversified housing portfolio”—namely, a single house. He said some research suggests individual home prices can be twice as volatile as broad house price indexes.

Combined with leverage, the lack of diversification can significantly increase one family’s risk. Emmons quoted Stanford University economists Monika Piazzesi and Martin Schneider to explain: “The high volatility of individual house prices, together with high transaction costs, lead to low Sharpe ratios (defined as average excess return on an asset, divided by its volatility) on housing.”3

Furthermore, black and Hispanic families face “very high volatility” in housing wealth, and the average increases in their HOE are no higher than gains experienced by white families. The Federal Reserve’s Survey of Consumer Finances (SCF) shows that nonhousing wealth generally increased much more than housing wealth, with no higher volatility.4


Emmons wrote that there are benefits to be had from owner-occupied housing, including portfolio diversification. However, Emmons’ data show that leveraged homeownership is riskier than nonhousing wealth and provides average increases that are no higher—and may be lower—than returns on nonhousing assets.

“This suggests that caution is warranted from a wealth-building perspective,” he concluded.

Notes and References  

1 The figures discussed in this publication are not true rate-of-return calculations because balance-sheet aggregates reflect both changes in asset prices and net investment flows in all asset categories. However, these are appropriate measures of actual wealth accumulation by asset type.

2Financial Accounts of the United States,” Federal Reserve Board of Governors, Sept. 21, 2017.

3 Piazzesi, Monika; and Schneider, Martin. “Housing and Macroeconomics.” National Bureau of Economic Research working paper No. 22354, July 2016.

4 The two Fed datasets collect data in very different ways. The aggregate data in the Financial Accounts reflect institutional data sources, while the SCF data reflect individual survey responses. The SCF data include estimates made by families of the value of their nontraded assets, such as houses.

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