Does Home Equity Count as Real Wealth?

Since 2020, home prices across the United States have skyrocketed, resulting in unprecedented levels of home equity for American homeowners. According to data highlighted by Realtor.com in September 2025, the Federal Reserve’s Flow of Funds report for the second quarter of that year indicated a significant rebound in the total value of owner-occupied real estate. This value climbed to an astonishing record high of $49.3 trillion, with home equity following suit and reaching an all-time peak of $35.8 trillion.

Given the substantial portion of wealth tied up in the U.S. housing market, a growing number of experts and analysts have started questioning whether these escalating real estate values truly signify genuine wealth creation. Kevin Erdmann, a researcher affiliated with the Mercatus Center, published a detailed paper entitled “We Are Not as Wealthy as We Thought We Were.” In this analysis, Erdmann posits that the surge in U.S. home values does not reflect actual increases in overall wealth but rather represents a regressive shift of income from renters and prospective homebuyers toward current property owners. He attributes this price escalation primarily to a persistent undersupply of housing rather than broader economic prosperity making Americans richer.

Michael Green, who gained prominence through his discussion on a $140k poverty threshold, has expressed a similar viewpoint. He argues that when the value of your personal residence jumps dramatically—say, from $200,000 to $1,000,000—it does not equate to newfound wealth. This is because any comparable replacement property in the same area would also command a $1,000,000 price tag. In essence, homeowners find themselves trapped: selling the property to pocket the gains is impractical since they still require housing, and alternatives nearby match the inflated costs. Consequently, there is no enhancement in purchasing power; instead, it’s merely a recalibration of living expenses.

Green’s observation holds true under particular circumstances: if your home appreciates in value, surrounding properties experience parallel increases, and you intend to remain in the same locale as a homeowner, no net wealth is realized. However, this scenario does not exhaust all possibilities. Green himself acknowledges alternatives such as downsizing—relocating to a lower-cost region, which often entails trade-offs in income potential, career opportunities, and lifestyle quality—or tapping into equity through borrowing mechanisms like home equity lines of credit (HELOCs) or reverse mortgages. Excluding borrowing options, downsizing remains a legitimate strategy for converting home equity into accessible funds.

Yet, for those uninterested in downsizing, an even more advantageous path exists that Green did not emphasize: transitioning to renting. Homeowners can sell their property, liquidate their equity, and opt to rent a single-family home. While rental availability might be constrained in certain neighborhoods, exploring local options—such as those on platforms like Zillow—often reveals viable choices.

This renting strategy merits consideration because rental prices have not escalated nearly as aggressively as home prices in recent years. The chart below, sourced from FRED data, illustrates how U.S. rents have only marginally exceeded the growth in nominal median U.S. household income since 1984.

Specifically, over this four-decade span, nominal U.S. rents have quadrupled, while median household incomes have risen by approximately 3.6 times. When examining the ratio of rent changes to income changes, rents relative to income peaked between 2000 and 2012 but have remained largely stable thereafter.

In reality, rents have risen by just 7% relative to median household income from 1984 to 2024. This stability contrasts sharply with the trajectory of U.S. home prices over the identical timeframe.

Although median household incomes have increased 3.6-fold since 1984, home prices have surged by 5.5 times. Dividing home price growth by income growth reveals that home prices have climbed 50% relative to incomes during this period.

These figures corroborate findings from Kevin Erdmann’s research, which determined that from 1975 to 2023, the total value of U.S. residential real estate expanded by 59% relative to incomes. This disparity underscores a fundamental issue in the contemporary U.S. housing market: home prices have outpaced income growth excessively, whereas rents have maintained far more reasonable proportionality.

Precisely for this reason, renting emerges as a compelling method to actualize the value embedded in home equity. Naturally, individuals should perform their own financial projections to assess feasibility. The author of this piece conducted such an analysis and found it persuasive enough to continue renting personally.

For instance, modeling the purchase of a $1 million two-bedroom unit in Jersey City yields a total monthly cost of approximately $8,400. This figure encompasses property taxes, ongoing maintenance, insurance premiums, and a 30-year fixed-rate mortgage at 6% interest following a 20% down payment. In comparison, the author recently secured an 18-month lease for a comparable two-bedroom unit in the same city at $4,650 per month—representing roughly a 45% reduction.

Investing the monthly differential over 30 years, assuming 5% nominal annual returns and 3% yearly rent inflation, results in approximately $600,000 more wealth in the renting scenario. This advantage arises from a modest 2% real return. Adjusting for a 4% real return elevates the renter’s lead to $2.4 million. Moreover, this approach preserves financial liquidity and eliminates the burdens of property upkeep.

Admittedly, financial considerations are not the sole factors in housing choices, yet this example illustrates that home equity constitutes authentic wealth provided one remains adaptable in leveraging it. Conversely, failing to downsize, borrow against it, or switch to renting means the equity remains unrealized during one’s lifetime, benefiting only heirs.

Individual Wealth Holds True, But Aggregate Wealth Evaporates

While home equity qualifies as legitimate wealth at the individual level, this assertion applies solely on a personal basis. A single homeowner can sell their property and convert equity into concrete financial resources. However, if a substantial number of homeowners attempted simultaneous sales, the outcome would differ markedly. Property values would plummet, exposing the illusory nature of that collective home equity.

This dynamic extends beyond real estate to every asset category. Should all owners of S&P 500 index funds rush to liquidate tomorrow, share prices would crater. Likewise, a mass exodus from gold holdings would erode the metal’s value substantially.

Ultimately, financial wealth materializes as real only for individuals at precise junctures when they can exchange it for tangible goods or cash. Mass attempts by groups to crystallize their wealth simultaneously lead to its dissipation. As noted in prior discussions, the true price of an asset reveals itself only upon sale.