Posted by: Josh Lehner | January 14, 2021

Rising Housing Wealth

Economists are increasing optimistic on the outlook in large part because household incomes are up, and consumer spending has largely followed. But it’s not just current income, we know asset markets are strong as well. Wealth is increasing, which supports additional consumer spending should households want or need it. While stock market wealth is very concentrated among high-income households, real estate wealth is a bit more broadly distributed, and is the key source of wealth for households in the middle and bottom parts of the distribution.

Given home price appreciation and a rising homeownership rate in recent years, the total value of owner-occupied housing is increasing faster than the overall economy as seen in the chart below. For now this excludes rental properties as some of those equity gains go to owners outside of the region, and the rental income from those properties shows up in the current income data.

But looking at the total value of housing overstates the real situation because it does not account for mortgage debt. The next chart tries to adjust for that. These estimates are built off of median mortgage debt and home equity lines of credit information, coupled with median home values. Then adjust those for the share of households who own their home free and clear and the like. While it’s a decent, rough estimate of owner-occupied equity in Oregon, it is also an underestimate of the true number because it is but off medians and not averages (average debt data is not readily available).

Even so, the patterns are very clear. Home equity is much larger today, relative to the size of the economy, then back during the housing bubble. There is a considerable amount of housing wealth that remains largely untapped today. And of course the Bend MSA really stands out on this chart. I was honestly surprised at the sheer size of home equity when I first put this together. I’ll come back to this in the near future, but the relative size of housing wealth in Bend puts it pretty rarefied air when looking across the nearly 400 metro areas around the country.

While the rise in home equity is clearly relevant from a personal finance perspective, what does it mean for the economy more broadly? That’s a little bit harder to say. I’ve spent some time lately re-reading a few research papers. As expected, the main conduit for broader economic implications is through consumer spending.

One of the landmark academic papers from Mian, Rao, and Sufi (2013) finds that the marginal propensity to consume out of housing wealth is 5-7%. That means if your home equity increases $10,000, then you will spend an additional $500-700. More recent research from Moody’s Analytics (no link) estimates that figure is closer to 4% in the years since the housing bubble burst. Even so, with home equity rising by tens of billions of dollars in Oregon last year, that would support additional consumers spending by hundreds of millions, if not a full billion of dollars.

Of course home equity isn’t liquid. One has to do a cash-out refinance, or take out a home equity line of credit or the like to access the wealth and spend it. As Calculated Risk has been tracking over the years, mortgage equity withdrawal has been really tame since the bubble, although it has picked up this year for the first time in a decade. Given the strong home equity position, and record low interest rates, it is possible that we will see more mortgage equity withdrawal moving forward as well, if it is needed.

So what do people do when they withdrawal equity? Recent research out of the Federal Reserve shows that many households spend it on home improvements, furnishings and the like. In other words the most common thing is taking out equity to improve or update the house itself. Other things households do is save a lot of it initially, likely to spend or invest it in the years ahead, or consolidate other forms of debt, with only relatively small amounts spent on other types of things like autos. Generally speaking households don’t treat home equity as an ATM. They seem to generally have a plan, which is great!

Given households incomes are up and the economy is not fully open, what else could households be spending their equity on in the last year? One thing to keep in mind is that we know personal savings and home equity are the major source of funding for small businesses. See the Federal Reserve’s Small Business Credit Survey for more. Even as the economy is doing much better than feared, businesses have struggled. Given the timing here, I think it makes a lot of theoretical sense that some of the recent equity withdrawals are being used to support businesses. Time will tell to what extent that is actually the case.

Finally, another option could be retirees maintaining their general spending or paying for long-term care which can amount to tens of thousands of dollars a year. This was a possibility brought up on Twitter by former Oregon Representative Julie Parrish, with a few others chiming in saying it’s a big, and growing need as the population ages. As our office has discussed before, many retirement-aged households do not have adequate private savings and social security accounts for the bulk of their income. So using home equity as a source of income would make sense when it is needed.

To this point, we know there is a growing number of homeowners who own their homes free and clear. They have lived in them a long time and have paid off the mortgage. This is expected to continue to increase in the years ahead, due to the Baby Boomers retiring. Now, a couple complicating factors here is that the Fed research noted above shows that mortgage equity withdrawal is something that 40-somethings do the most, and 60- and 70-somethings do the least. Additionally, we know downsizing also isn’t really a thing. As such, it is probably reasonable to expect long-time homeowners to largely sit on their equity until the day comes when they either have to move into some sort of assisted living, or their finances dictate a need.

All told, home equity has been increasing considerably in the past decade. Current homeowners are in much better financial positions than they were a decade or two ago. Just how much this equity will support consumer spending and future economic growth is still to be determined. Even without a big increase in mortgage equity withdrawal, it could add a couple tenths of a percent to annual GDP growth. Of course not all of this is good news. The system we have in place where homeownership is the best (only?) path to wealth building for most households isn’t great. Housing cannot be both affordable and a good investment, outside of the forced savings part and paying down debt. One reason equity has risen is due to the undersupply or relative lack of new construction driving prices higher.

Stay tuned, I have a lot more along these lines coming in the near future including an update on construction relative to population growth, comparing housing wealth across metro areas, and digging further into the latest Survey of Consumer Finance to look at the stock of unrealized capital gains.


  1. Do you also follow those buying homes with cash as opposed to a mortgage? I hear lots of folks moving here are buying up homes with cash. Wonder what that means for general economic impacts.

    • I’m not sure about recent trends. Cash buyers have been a sizable share of the market in the past decade, but I don’t know if that accelerated or not in 2020. Will keep my eyes open for the data. I know the Central Oregon Realtors Association tracks that in their quarterly reports (not updated yet) but the standard RMLS data in Portland doesn’t report the financing/types.

  2. Welcome to the New Year Josh!

    I’m going to continue to press you to look at “best evidence” regarding the “housing affordability” issue. As a reminder:

    “Housing Affordability” can be divided into three household situations:
    a) Individuals and families that simply cannot afford any available housing and are either “unhoused” or staying temporarily with relatives, a shelter, etc.
    b) Households that are “housing-cost-burdened” whereby after they pay rent (almost all of these are renters), they don’t have adequate funds to pay for other human necessities (health care, food, etc.)
    c) Households that can’t afford any of the available housing that they deem “desirable.”

    The last category (c) is an “expectation” and “market” issue, not a “state” problem. While it’s fine for legislators to consider ways to improve the economy in various ways, these households do not merit “takings” from other households to subsidize the households’ “buying up.”

    The first two categories should be what you provide the “best evidence” for legislators to consider.

    The very first step is to move from “percent of income” metric to “residual income” as the metric to understand the scope and nature of “housing-cost-burden” in Oregon and local communities.

    I think you understand the many structure flaws in “percent of income.” In fact, you mention one above — older retirees whose houses are fully paid; off; who have limited income; but who have adequate residual income and support (e.g., the major expense reduction by being on Medicare).

    In addition student populations can create a dramatic skew in the picture presented by “percent of income.”

    Once you can produce relevant statistics, then legislators and citizens can look at what should be done.

    Instead, we have “woke” YIMBY zealots pushing “middle housing” and “eliminating single-family zoning” nonsense, instead of looking at how to lower the development costs, and provide funding for, subsidized apartments sited where there’s good public transit.

    • Hi Paul,

      I agree residual income is the better way to look at affordability. A few years back we showed residual income approximations for the typical household in each zip code in Oregon. One issue here is we lack good data on individual household spending patterns. That earlier work just a blunt estimate of non-housing expenditures for U.S. households in the second quartile or something like that. Considered that a not terrible starting point. Do you have recommendations for how to improve that work? Something similar but I was thinking running it through the actual microdata so we can look household by household instead of median households based on the published tables. Adjusting for household size is probably important as well, but I wasn’t sure how to scale the numbers? Something like the self-sufficiency standard does that household adjustment, but the income needed for those calculations is higher than what most people survive on. Not that they’re wrong, just that many people manage to get by without hitting those benchmarks.

      And on development, removing exclusionary single family zoning should provide a boost to housing supply over the long run, and help with affordability. It’s not a silver bullet and it’s not instantaneous. I also believe development costs and SDCs and likely part of the next major housing discussion that the Legislature will have. We seem to have shifted away from property taxes themselves as funding for city infrastructure and instead replaced it more with SDCs and the idea that new growth must pay for itself.


      • Re: Assessing the true measure of “housing-cost burdened” households.

        Here’s what seems to be a good starting point. The paper provides their methodology.

        Measuring Housing Affordability: Assessing the 30 Percent of Income Standard
        by Christopher Herbert, Alexander Hermann, Daniel McCue; Joint Center for Housing Studies of Harvard University

        This Harvard study provides detailed data and analysis to confirm that the commonly used criterion – a household is “housing-cost burdened” when they spend more than 30% of their household income on housing – isn’t an accurate metric. Obviously, a household with a million dollar income can afford to spend much more than $300,000 per year in mortgage payments and not be “housing-cost burdened.” Similarly, a household with $15,000 annual income may be “housing-cost burdened” is they must spend $3,000 (i.e., 20%) of their income on rent.

        The authors confirm that a more realistic criteria is – a household is “housing-cost burdened” when the “residual income” left after housing costs is less than the local costs for taxes and basic necessities. This studies analysis for three different cities concludes that the “30%” criterion overstates the percentage of high-income households, and understates the percentage of low-income households, that are actually “housing-cost” burdened.

        The study doesn’t extend to analyzing how this more accurate metric affects the analysis of the supply of housing that’s affordable to the households in an area. However, it’s a direct step to conclude that the “residual income” metric would amplify the relative proportion of “housing-cost burdened” households among the “Very Low Income” (VLI) and “Extremely Low Income” (ELI) categories. (See The Gap Report 2020 by the National Low-Income Housing Coalition.

        And, of course, using “unfiltered” Census data can be significantly skewed by such atypical cases as student residents.

      • Re: “Development”

        “[R]emoving exclusionary single family zoning should provide a boost to housing supply over the long run, and help with affordability. It’s not a silver bullet and it’s not instantaneous.

        Nothing personal, but this statement is a perfect example of three logical flaws:
        1. The “cheap shot” fallacy: Using a loaded term “exclusionary”; and
        2. The “bait-and-switch” fallacy: Stating a true fact, followed by an unsupported implication; and
        3. The “smokescreen” fallacy: Using meaningless qualifiers solely to provide the claim with a cloak of inarguability.

        The rebuttals are simple:

        1. All zoning is “exclusionary.” That’s the sole purpose of zoning. “Single-family zoning” is undefined, and there’s no evidence that whatever that term means is a significant barrier to affordable housing in the overall context (e.g., when there’s plentiful land zoned for “multi-family”) But we’re supposed to feel “single-family” zoning is not only a limit to affordable housing — it’s unethical because it’s somehow uniquely “exclusionary.”

        2. It’s probably true that relaxing or removing any approval criteria will provide an “boost” (even if one net dwelling) to housing supply. It’s absolutely not a foregone implication that the result will “help with affordability.” The obvious case is demolishing an older, less costly rental dwelling with two $500K condos will WORSEN housing costs. This isn’t hypothetical. Plenty of supporting research on direct (as above) and indirect (increased costs) displacement from upzoning “single-family” neighborhoods.

        3.”Over the long run” and (redundantly) “not instantaneous” really provide no information about HOW beneficial (if any) the action would be. Really, no good research should be using terms like these. The appropriate qualifier would be “We have no idea what the effect would be …”

        — Paul

      • Hi Paul,

        Do you have an example where a duplex or townhomes were built that cost more than a new detached single family home? I’ve been looking for real world examples here. I’ve had an example literally across the street from me where each townhome sold for ~$450,000 while two new detached single family homes about 5 properties away sold for $700,000 and $800,000 respectively. How is that not helping with affordability? The point is that as properties get redeveloped over time, policies now allow for more types of housing options should the builder/buyers want it. That’s it. That’s the exclusionary part. Previously you could only put in a detached single family home. Now you can do that, or if the builder/buyers want, you can put in 2 or 3 townhomes.


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