Home equity could fuel a massive wealth transfer in the coming years

Homeowners born before 1964 have a collective $17 trillion in home equity, and three-quarters of them plan to pass that wealth on to their children when they die, according to a new survey from Freddie Mac. It’s part of a massive wealth transfer that will reshape the economy in the next few decades and potentially exacerbate inequality.

“It’s a huge deal,” said Sam Khater, chief economist at Freddie Mac. “You’ll see an intergenerational wealth effect as the money is transferred from retirees to their heirs, who are younger and still in their prime consumption years.”

Just in the last five years, baby boomers have grown $19 trillion richer, Khater said, or $486,000 per household. According to Freddie Mac, half of that increase is due to house price appreciation, which helps explain why nearly 70% of baby boomer homeowners in the company’s recent survey said they feel confident about having a comfortable retirement.

That’s actually down from more than 80% in 2021. Recent inflation has likely dented that confidence a bit, Khater said. Yet only 42% of boomer renters expressed confidence in their ability to retire comfortably.

“So this really shows how much of a difference that homeownership can make,” Khater said. “And for the bulk of households, homeownership is their primary form of wealth.”

Interestingly, though, only 9% said they planned to use their home equity to fund their retirement. Most plan to pass it on to their children or other family members. That could perpetuate wealth inequity in our society, said Linna Zhu, senior research associate at the Urban Institute.

While more than 82% of older white households own their homes, less than 60% of older Black households do.

“Our research found that this pathway disproportionately favors white homeowners, who tend to own higher-valued homes and owe less mortgage debt as compared to their Black and Hispanic counterparts,” Zhu said. 

People who receive an inheritance are more likely to become homeowners themselves and have wealth to pass on to their heirs, Zhu said, a cycle she said will continue without policies to support more equitable access to homeownership and other opportunities to build wealth.

But children of homeowners shouldn’t count on a windfall, said Jason Fichtner, chief economist at the Bipartisan Policy Center.

“I’m a retirement security expert as an economist, and the first thing I tell younger people is, ‘Please do not look at your parents as your retirement plan,'” Fichtner said. 

People are living longer, while Social Security is running out of money and traditional pensions are vanishing, Fichtner added. Even if baby boomers plan to pass on housing wealth to their heirs, they might end up needing it themselves.

“If someone’s sitting on a $250,000 house, and it’s paid off, and they get into their 80s and they need long-term care, long-term care can cost $10,000 a month right now,” Fichtner said. “That’s going to buy you 2, 2½ years of long-term care.”

The trouble is, unless that person sells the house, it can be hard to tap into that wealth.

“It’s very frustrating in the sense that it’s a big source of wealth,” said Alicia Munnell, senior adviser to the Center for Retirement Research at Boston College. “It could be helping the older generation itself to live more comfortably. They don’t access it, they keep it, and then they leave it to their children.”

Those children may not even want the house, she said, “with all that junk in it, and they’ve got to figure out what to do.”

Munnell would like to see better offerings like reverse mortgages and property tax deferral programs that allow older homeowners to access cash that’s repaid when the home eventually sells.

And yet, Munnell said she plans to leave her house to her children.

“Because I don’t want to move,” she said. “So they’re just going to have to clean things out.”