The Problem with Being House-Rich

their largest financial asset. Columnist Ben Carson explains why. “The housing market is more important for the middle class than the stock market because ownership of residential real estate is more widespread. The top 10% controls nearly 90% of the stock market while the bottom 90% owns more than 55% of the housing market”.  That’s quite a concentration of wealth in our equities market. However, housing appears to be our nation’s more democratized source of wealth.  Before we go further, please don’t forget I’m not a financial advisor but a reverse mortgage industry commentator who’s passionate about the appropriate use of reverse mortgages to unlock housing wealth. If you would do me a favor and hit the like button- it tremendously helps our ranking in the YouTube algorithm.

While the middle class has successfully embraced homeownership and subsequently accumulated significant equity in their home, there are a few challenges and risks.

First, concentrated housing wealth leaves homeowners exposed to considerable losses. For example, the other 80% in this chart from Fortune represents your typical middle-class household where wealth is highly concentrated in their home or real estate. Why is there such a difference between where the wealthy and middle class invest? One reason may be that most Americans are typically not prone to putting aside substantial savings or investments. However, a mortgage on the home is somewhat of a forced savings plan in hopes that the investment will yield substantial returns. Consequently, this concentration of wealth leaves much of the middle class at tremendous risk of housing market fluctuations or resets.

Second, is home equity is neither liquid nor secure. History has taught us that a run-up of home appreciation can easily be erased in a few short years and may take up to a decade to recover. For example, in Las Vegas, it took 15 years for home values to recover to their 2006 high-water mark! For most markets, it wasn’t until 2019 that home prices rebounded back to their pre-2008 values. And don’t forget to factor in inflation.

Third, as an investment, home ownership involves ongoing costs. Carson writes, “For one thing, the wealth gains cited in the research by the NAR are on a gross basis. You have to net out all of the ancillary costs involved with homeownership to get the real number. Things like realtor fees, closing costs, property taxes, moving expenses, insurance, upkeep, and maintenance can take a huge bite out of any nominal price increases”.

So what options do homeowners have to convert an illiquid asset such as a home into readily available cash? Getting a home equity line of credit or HELOC is one option, but the credit line could be frozen or closed, and monthly payments are required.

You could sell the home and buy another, but at today’s interest rates, who wants to abandon a lower mortgage rate only to jump into a higher rate and payment? The only exception to this would be if one moves from a high-cost to a low-cost area.

Another option is to sell and then rent. While this may allow one to secure their equity at today’s prices, it forgoes the opportunity to accumulate home equity.

But what if you don’t want to pack up and sell or get a HELOC that could be frozen? There’s actually one option that could secure a portion of one’s home equity based on today’s prices instead of waiting until home values have fallen that doesn’t entail required monthly mortgage payments or selling. In such instances, this is where a reverse mortgage could provide unsurpassed flexibility. Yes, there’s a problem with being house-rich if you have no desirable way to separate the equity that doesn’t incur risk. However, being house-rich and knowing what options are available can empower homeowners to take action at a time that best meets their interests and goals.

Resources:
[A Wealth of Common Sense] The Problem With Being House Rich