You might think you should be worried about the stock market, but there’s a great article by Ben Carlson on “The Wealth of Common Sense.” blog It’s a very telling point that the stock market is probably not the most important barometer of financial health for most Americans. That award should go to the housing market. Home prices and interest rates are the indicators that most low- and middle-income households should be worried about.
Let’s explore why the housing market is so important to most households.
The super-rich own the most stocks
When stock prices fall, it is not the majority of Americans who benefit or lose the most, but those who are already wealthy.
The top 1% of all households own 53.9% of the market’s stock, the top 10% own almost 90%, the 50% to 90% households own 10.5%, and the bottom 50% own just 0.6%.
Real estate holdings are somewhat evenly distributed
When it comes to real estate, wealth is distributed evenly up and down the wealth curve.
The top 10% own a smaller percentage of real estate overall, owning 44.5% of real estate (versus 90% of stocks).
The vast majority of real estate holdings, 42.4% (10.5% equity), are owned by people in the 50%-90% range of all households, while the bottom 50% own 13.1% of all real estate (0.6% equity).
The real estate market affects more people than the stock market.
The stock market makes the front pages and worries everyone, but as the data above shows, it’s the real estate market that affects the most people.
Home equity makes up a larger share of the average household’s wealth than savings
According to a February 2024 ICE Mortgage Monitor report, the average homeowner is currently Approximately $299,000 Home equity values have increased significantly compared to the average property value of $185,000 just a few years ago.
If you’re fortunate enough to live in an area where home prices are rising and your mortgage is paid off or you’re making steady payments, growing home equity is the ultimate passive income. Freddie MacHome equity growth averages 3% per year, but in some areas is much higher.
The average home equity is worth much more than the average savings
The average savings balance is less than one-quarter of the average home’s equity.The weighted average savings account balance for Americans is $41,600, which includes checking accounts, savings accounts, money market cards, and prepaid debit cards.
Note: Savings and home equity balances vary widely by age and location. How do they compare? See averages for cash, savings, home equity and other balances…
Mortgages are also an important indicator for the majority of Americans.
The top 10% of the wealthiest people in the country own 70% of the net worth, while the bottom 90% own 75% of the debt, much of it mortgages.
So, outside of the stock market, what financial metrics mean the most to most households?
Because home equity and mortgages are large components of the balance sheets of most American households, interest rates, inflation, and the health of the housing market have the greatest impact on the financial security of the most people.
Let’s examine these indicators.
Housing market health
Rising home prices are likely to continue to increase the net worth of many households.
You can also convert your home equity into cash if necessary to help with retirement or other expenses.
A strong housing market can help offset some of the impact of a low savings rate by looking at ways to reduce housing costs and put your home equity to good use.
Interest level
Interest rates have a big impact because they affect both home prices and mortgage payments (in the case of adjustable rate mortgages).
When interest rates rise, as they do today, mortgage rates also rise, reducing the amount people can borrow and therefore pay as little for homes, so home prices tend to remain flat or even fall.
Similarly, if you have an adjustable-rate mortgage, rising interest rates could mean higher mortgage rates and monthly payments, leaving less money available for other expenses, savings, and investments.
Inflation (and its impact on debt)
Inflation has certainly hit low and middle-income households, whose incomes have not increased in proportion to rising prices.
But one of the few bright sides of high inflation is that it benefits people who are in debt. Debtors benefit from inflation because they pay back their creditors with dollars that are worth less in terms of purchasing power. For example, you might still have $100,000 owed on your mortgage, but because of inflation, that $100,000 is worth less than it was when you borrowed it.
“Given that the bottom 90 percent hold 75 percent of household debt and the bottom 50 percent hold roughly one-third of all debt, inflation is disproportionately helping the middle and lower classes with debt,” Carlson wrote.
What are the key metrics for you?
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Take full control of your finances and know what really matters to your financial situation.