Home: A Great Wealth Creator

May 1, 2002

You’ve been hearing how housing has carried the nation’s economy through its recent downturn and ongoing recovery—baffling some experts as to why. The headline of a recent New York Times article crowed, “Economy’s Rock: Homes, Homes, Homes!”

In 2001, as the economy slogged along and people watched their stock portfolios sink, homes kept right on selling. They still are. Existing-home sales posted a record last year—5.3 million sales—that pushed the homeownership rate up to 68 percent nationwide. And the pace of sales was even higher in January and February of this year.

It’s obvious that Americans believe there’s great value in owning a home; we’ve added 11 million new homeowners in 10 years. A 2001 survey by NAR shows that a home represents a large portion of wealth for three out of four homeowners. Last year, the median existing-home price increased 5.5 percent, while stock indexes varied widely and unpredictably. Since record keeping began in 1968, the national median home price has risen every year, even during recessions and periods of sales decline.

Homeowners are using the value of their homes to make important financial decisions; the NAR survey shows that 16 percent of homeowners have increased their spending because of their home equity, even when they don’t take out an equity loan. They often use the capital gains from the sale of their home as a downpayment for a trade-up home. They use their equity to buy businesses, purchase second homes, take out emergency cash, or buy big-ticket items.

By contrast, a study by the Federal Reserve suggests that only 3.4 percent of those holding equity in stocks in 2001 increased their spending as a result.

It’s difficult to ignore the wealth effect of homeownership. In 1998, home equity accounted for 55 percent of the typical household’s total net worth—far more than any other investments, including retirement accounts, stock and mutual fund shares, savings bonds, rental property, and other financial accounts.

That fact alone is shoring up consumer confidence and fueling the economy for the better, which makes homeownership one of the best investments of the year. Maybe the best investment of a lifetime.

Martin Edwards Jr., CCIM, CIPS, was 2002 president of the NATIONAL ASSOCIATION OF REALTORS®.

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