Posted by: Josh Lehner | May 3, 2018

Rising Home Equity in Perspective

We all know that the combination of growing demand in the face of limited supply has pushed housing costs higher. One side of this coin means eroding affordability for renters, and for those looking to buy. Clearly this has happened and is a big problem, even as affordability is set to improve some in the coming years. The other side of the coin, however, means rising wealth for current homeowners. Home equity is by far the biggest, and at times the only source of wealth for households outside of the top of the income distribution. As such, rising home equity isn’t entirely a bad thing. It’s a problem when appreciation and home equity gains outstrip income growth, leading to greater inequality and the like. In recent months I have seen a handful of reports scroll across Twitter showing home value gains in different metros around the country. It made me wonder just how much housing wealth has been created due to the lack of supply and affordability crunch in recent years.

Unfortunately, while data on home values is plentiful, data on home equity is not. So I have stitched together data from the American Community Survey that shows home values, and the number of homeowners with a mortgage and those without a mortgage, data from the Philly Fed’s consumer panel that shows debt loads for mortgages and home equity lines of credit, and data from the American Housing Survey that shows home values and mortgage situation for households based on how long they have lived in their current residence. The only Oregon geography for which all of these pieces are available is the Portland MSA, and we need all of these pieces to pull together an estimate of home equity.

The big takeaway of course is that we have seen a big rise in home equity in the Portland region in recent years. These gains are significantly larger than any measure of economic growth during this period. This first chart below shows the annual increases in dollar amounts for total home equity, total personal income, and for the region’s GDP. In the past few years, home equity increases have been twice as large as underlying economic growth. In terms of the outlook, the baseline forecast expects home equity gains to slow due to prices rising at a slower pace, and with new homeowners having larger debt loads, thus shifting the composition a little bit. That said, home equity gains have been quite large in recent years and are still expected to match economic growth moving forward.
The housing wealth created this cycle is larger than the gains created during the housing bubble. Some of that is due to inflation (higher prices), some due to relatively lower debt levels (larger down payments, fewer second mortgages and HELOCs), and some due to having a larger population today. However, even when measured as a share of the economy, home equity has now surpassed its previous peak. Keep in mind that land values or home values are significantly higher than this which just measures net wealth (values minus debts).

Now, tying these new estimates back to the aforementioned reports from around the country shows that the typical homeowner in Portland has seen a significant increase in wealth. Over the past 5 years, the median homeowner equity has increased by about $121,000. While these increases may be smaller than those seen in the Bay Area or up in Seattle, these are still quite large. To help put it in perspective somewhat, the next chart shows the annual gain in home equity in the blue bar, and the percentage of households in the region that earned less money than that during the year. Lets take 2016 as an example, albeit an extreme one. In 2016, the typical homeowner saw their home equity rise by $39,000. During the same year, 28% of all Portland area households had incomes of $39,000 or less. The goal here is not to fan the flames of some sort of class warfare. Rather it is to help frame and quantify the discussion surrounding the current housing market. The wealth gains in recent years due to the unbalanced market are big. UPDATE: Equity and wealth are not the same as income. While a homeowner can tap their wealth via a home equity line of credit, it is still not the same as cash flow. To fully realize these gains, an owner has to sell the property.

Another way to show the same sort of thing would be to convert the home equity gains into their hourly wage equivalent (based on an FTE of 2,080 hours). Essentially the housing wealth created this cycle is the equivalent of adding a low-wage job to one’s household income, or in this case wealth. Of course the big difference is, you know, that current homeowners reaped the benefits of the rising market without having to perform any actual work.

Finally, it should be pointed out that the housing wealth created this cycle has been on a narrower base. First, homeownership is lower today, meaning fewer households as a share of all households, have seen these increases. The flip side is that landlords and other property owners have seen a larger share of the gains this cycle.

Second, we know wealth is even more concentrated than income. This goes for the overall distribution, where asset price increases accrue to the top of the distribution, but it also goes for differences seen across various racial and ethnic groups. While the racial wealth gap nationwide is large, and the gap is more complicated than homeownership alone, we know that housing and home equity makes up a large portion of most household’s wealth. Locally we can see that concentration by race and ethnicity as well. 

Bottom Line: The current housing market has created clear winners and losers. As our office tries to highlight as much as possible, one of the biggest risks to the regional outlook is our ability to ensure an adequate housing supply. There are two big reasons why. First, an adequate supply means better affordability, benefiting local residents and their household finances. Second, not enough units will slow migration, increase displacement, and the like. The end result would be to lower our longer-run economic growth prospects if the inflows of young, skilled households dries up.

I’ll have more on migration and housing-related moves next week.


  1. […] Source: Rising Home Equity in Perspective | Oregon Office of Economic Analysis […]

  2. […] growth may not be that much slower due to a worsening affordability and supply problem, but distribution of that growth and consequences for lower- and moderate-income households certainly would be […]

  3. […] duplexes “takes housing from the poor to build housing for the rich” without mentioning what happens when a capitalist society has been failing to build enough […]

  4. […] However, underlying these topline trends, different factors are at play. Rising interest rates make the financing costs of carrying a mortgage more burdensome for households, as do higher home prices. As the market rebalances, will the adjustment be on the buyer or on the seller? Meaning, will buyers continue to spend a larger share of their income on housing, or will the adjustment come in the form of slower price appreciation? My bet is on the latter. At some point rising borrowing costs will have to come out of the selling price as households max out their budget. For every one percentage point increase in the mortgage rate, purchasing power falls by about 10 percent. Meaning if you can afford a $400,000 home at a 4% interest rate, you can afford a $360,000 home at a 5% interest rate. That said, at least so far in recent years, it has been the buyer doing the adjusting and spending more. Sellers have reaped the benefits, as have all owners in terms of home equity. […]

  5. […] Investors and landlords are selling their properties as prices have rebounded, pocketing a big increase in home equity along the way.. This added wrinkle means we are seeing a shift in the types of rental properties in […]

  6. […] does housing demand which places upward pressure on housing costs. This is great for homeowners as wealth builds, but bad for renters and the economy more broadly. Provided we, as a community, actually want to […]

  7. […] is housing, or home equity. This is particularly true in recent years given the housing market. Owner occupied home equity in Oregon, as a share of personal income, or as a share of GDP, is at an all-time high. Across the country, […]

  8. […] that our office previously looked at wealth, its sources and implications, and a deeper dive into home equity gains in the Portland area. It’s been a few years since we last wrote about estate taxes here on the blog, so stay […]

  9. […] recent report by the Oregon Office of Economic Analysis has revealed that home equity is the biggest source of wealth here in the U.S. That means that […]

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