Building Assets, Building Credit: Creating Wealth in Low-Income Communities

Chapter 4. Refinance and the Accumulation of Home Equity Wealth

In aggregate across the United States, home equity totaled $9.6 trillion by the end of 2004, an increase of $3.7 trillion in just five years.1 According to the 2001 Survey of Consumer Finances, home equity (the difference between the home value and amount of mortgage debt on the property) accounted for at least 50 percent of net wealth for one-half of all households. Home equity is not only the single largest component of net wealth for most families, but is also held by a broader cross section of families when compared with other assets. For example, the U.S. homeownership rate was 69 percent in 2004, while only 52 percent of American families held stock either directly or indirectly.2 Thus an increase in real home equity (that is, adjusting for general inflation) is the most significant component to overall wealth building. This is particularly true for lower-income households, who tend to have more limited access to and investment in other forms of wealth. The homeownership rate for families with income below the median was 52 percent in 2004, while only 28 percent held stock market assets. Poterba (2000) reported that in 1998 the top 1 percent of stock equity investors held about one-half of total 71 Refinance and the Accumulation of Home Equity Wealth frank e. nothaft and yan chang 4 1. Federal Reserve Board, “Flow of Funds, Release Z.1,” table B.100. Home equity was $5.9 trillion as of December 31, 1999. 2. Homeownership data were from www.census.gov. Stock holdings were reported in Aizcorbe, Kennickell, and Moore (2003, table 6) and reflect 2001 data. 06 7409-5 ch04.qxd 7/7/2005 10:11 PM Page 71 stock market wealth, while the 1 percent of households with the greatest holdings of real estate owned only 15 percent of all real estate. In fact, about threequarters of all stock-market wealth is held by the highest decile of income earners in the United States and almost none is held by families whose earnings fall in the lowest third of the income distribution, whereas home equity wealth has a more equal distribution across income groups, as shown in figure 4-1. Because home equity wealth is more evenly distributed, lower-, middle-, and higherincome families all benefit from a general rise in home equity. 72 making choices Figure 4-1. Home Equity and Stock Holdings by Income Group Decile Tenth decile 36% Ninth decile 13% Eighth decile 11% Seventh decile 9% Sixth decile 7% Fifth decile 6% Fourth decile 6% Third decile 6% Second decile 4% First decile 2% A. Home equity Tenth decile 74% Ninth decile 8% Eighth decile 6% Seventh decile 5% Sixth decile 2% Fifth decile 2% Fourth decile 2% Third decile 1% Second decile 0% First decile 0% B. Stock holdings Source: Survey of Consumer Finances, 2001. 06 7409-5 ch04.qxd 7/7/2005 10:11 PM Page 72 Calculation of Gini ratios confirms the more equitable distribution of home equity wealth across the American population. The Gini ratio has a value between zero and one, with zero designating the financial item under analysis is evenly distributed across income groups, and one indicating the highest-income household exclusively holds it. Using the 2001 Survey of Consumer Finances, the Gini ratio was 0.40 for home equity, 0.62 for net wealth, and 0.76 for stock market assets. Thus home equity is more evenly distributed across families than total wealth or stock market holdings. Figure 4-2 shows the Lorenz curves for home equity and stock market assets, with the home equity curve closer to the straight line that indicates equal distribution across all families. The Lorenz curve is used in economics to describe inequality in wealth. The Lorenz curve is a function of the cumulative proportion of ordered individuals mapped onto the corresponding cumulative proportion of their wealth. Given a sample of n ordered individuals with xi¢ the wealth of individual i and x1¢ 80 and£ 120 75,880 81,395 86,822 74,681 73,129 76,482 74,018 77,830 90,680 >120 and£ 160 79,055 85,690 88,465 76,935 71,616 77,639 76,157 82,772 101,103 >160 and£ 200 85,055 90,282 96,417 82,903 75,704 77,978 80,022 86,678 104,900 >200 112,081 117,457 129...