Three Longs & Three Shorts

The rich own stocks, the middle class own homes. How betting it all on real estate is a wealth gap problem

Ben Carlson comes at the inequality challenge from an asset class ownership point of view. Over the last decade or so much of economic policy making such as quantitative easing has benefited owners of capital i.e, the rich with financial markets having their best decade. And hence contributed to the growing inequality between the have’s and the have not’s. In specific, Ben points to the fact that the American dream of home ownership means most middle class people either save up all their lives to buy a home or take a mortgage on the home only to spend the rest of their lives working to repay, leaving little to be invested in financial assets. Indians too have had a fascination with real estate not just as a home for self dwelling but also an investment avenue. The under-performance of real estate over the past seven years has meant that this is changing at the margin as seen with the significant inflows into financial assets, in particular mutual funds.
“…The top 1% have seen the biggest wealth gains by far since Great Recession began in 2007 but this trend has been in place for decades now. The top 1% continues to increase their stranglehold on wealth in this country while the middle and lower class are losing ground.
One of the biggest differences between the wealthy class and everyone else is their ownership of financial assets. Data from Edward Wolff shows the top 10% in terms of wealth own roughly 84% of the stock market in the United States. And that number is rising, up from 77% in 2001.
The rich own financial assets while the rest of the population has the majority of their net worth tied up in their home. There are a number of reasons why this disparity has made things difficult on the middle class.
The Great Recession was the worst financial crisis since the Great Depression because falling home prices impacted so many consumers. And the housing market took much longer to recover from its losses than the stock market.
While the S&P 500 bottomed in the spring of 2009, it wasn’t until 2012 that real estate hit its nadir. And while housing has recovered nicely since that time, the Case-Shiller Home Price Index didn’t break even until the end of 2016. It’s only in the last few years that many long-term homeowners have experienced meaningful gains in their real estate assets.
U.S. household debt is roughly $14 trillion as of the latest reading. Nearly $9.5 trillion of that number comes in the form of mortgages (with the rest made up of auto loans, credit card debt and student loans). That means close to 70% of household debt comes from borrowing to buy a house.
The bottom 50% of households by wealth are in debt to the tune of $5.6 trillion. Only around 50% of all Americans have a direct ownership stake in the stock market. This means the bottom 50% has basically nothing invested in financial assets outside of a primary residence but holds around 40% of the total debt load.
The great myth of the American dream is that buying a home will be the best investment you’ll ever make. Could that be the case? Certainly for those in the right markets at the right time, especially when you consider the leverage involved in owning a home.
But owning a home is not only a liability that slowly turns into an asset but also a form of consumption. You have to pay property taxes. Maintenance and upkeep are required. Designs can go out of style which could require renovations over time. There are also transaction costs involved with the purchase and sale of a home, along with the interest being paid on the loan.
When you take all of the costs into consideration the investment outlook on a home may not be as great as many have led you to believe. Then there’s the fact that you can’t spend your house as it’s an illiquid asset.”