Homeownership & Generational Wealth

National data indicates that average homes, which sold for $47,200 in 1980, sold for $301,000 in 2021. That same data fails to reveal the original homeowner likely paid at least $222,600 in principal and interest on their first mortgage. Taxes, insurance, and maintenance expenses likely pushed the costs for owning that home over the amount of the eventual selling price.

Simple mathematics reveals that homeownership is not the key to creating wealth for the first generation. Obviously, a mortgage-free house will probably contribute to their financial independence during retirement. More importantly, homeownership certainly contributes to generational wealth if the eventual transfer of ownership to their adult children is managed properly.

Wants and Needs

Affordability is a relative term and made even more confusing by the media. From the Seller’s perspective, all houses will eventually sell; however, the price at which they sell may be considerably lower than the price the Seller wanted. From a Buyer’s perspective, there will always be an affordable house on the market, it just may not be their dream house.

The Affordability Gap is not uniquely a real estate industry problem; it is essentially a gap between the households wants and needs.  Lifestyle Creep has created a large segment of American society whose wants increasingly exceed their needs, and in many cases, exceed their budgets.

A recent survey indicated 72% of renters would prefer to own a home “if they could afford it.” However, the obvious follow-up question was lacking. How many of these prospective homebuyers were actually living below their means and aggressively saving money for a 20% down payment or more, so they could qualify for a mortgage to purchase the house they need? The rising delinquency rate on consumer credit, automobile loans, and student loans indicates financial illiteracy and lack of financial discipline are most likely the root cause of the affordability problem.

Pride of Ownership

The reason the residential mortgage industry allows the use of leverage so effectively is because most homeowners have “skin in the game.” The “no money down-high interest floating rate loans” are not the key to homeownership. Bundling subprime mortgages with quality mortgages to sell to unsuspecting investors as collateralized mortgage obligations is not advantageous to future homeowners because these risky financial products merely increase borrowing costs.

Ultimately, the entire future of the real estate industry will be dependent on the ability of prospective homeowners to make the sacrifices necessary to purchase a home. If more of our younger generations give up on the dream of eventually owning a home, they will stop saving for a better future for themselves and their children. Then, as we are observing in population growth areas, the residential real estate industry will increasingly become dominated by investors and perpetual renters.

In 2024, Wall Street firms significantly increased their investments in single-family rentals. The investment surge is especially noticeable in build-to-rent developments. These communities offer upscale amenities now, but what happens when maintenance costs increase and cash flow decreases?

A bright future for residential real estate depends on the formation of young households that aspire to become homeowners. Owners take pride in their homes and neighborhoods. Owners maintain their homes, upgrade them, and contribute to their communities, all of which support stable property values.

Homeownership is especially important for young households because it promotes financial security, family stability, and general well-being.

• Financial security – Households slowly build equity and wealth through the forced savings built into mortgage payments. Equity begins to grow after ten years as the house appreciates and more of the mortgage payment is applied to reducing the balance of the loan. Meanwhile, the interest payments can be applied toward a reduction in income taxes.

• Family stability – Homeownership tends to encourage staying in the same neighborhood, which promotes community involvement and fosters a sense of belonging. Children remain in the same school system, which generally enhances academic performance and social development. Less frequent moving also lowers financial and emotional stress on the parents and their children.

• General well-being – There are many physical and emotional benefits associated with homeownership. Owners can decorate and improve their living spaces to suit their individuality. Stable, quality housing improves the physical and mental health of children. Families become a part of their community through volunteering, sports, and social events.

Net Worth and Generational Wealth

Homeownership promotes financial responsibility, which contributes to the growth of the household’s net worth. According to a survey conducted by the Federal Reserve in 2016, the median homeowner’s net worth was $231,400, while the typical renter’s net worth was only $5,200. In 2024 the net worth of median homeowners grew to $400,000, while the net worth of renters grew to $10,400. By the time most original homeowners die their net worth will be approximately 45 times greater than the net worth of the median renter at their death.

Homeownership opens the door to other investments, enhances the household’s purchasing power, improves creditworthiness, and provides the opportunity to create a legacy through the transfer of wealth to future generations. Homeowners (78%) are more likely than renters (48%) to own other appreciating assets, including stocks, bonds, and retirement funds that contribute to their net worth.

Approximately 80% of all generational wealth in the United States is transferred through homeownership. This transfer of wealth creates a cycle in which the children of homeowners are 4% more likely to own homes than children of renters. Homeowners are more likely able to provide down payment assistance when their adult children are ready to purchase a home. Currently, approximately 37% of millennial, first-time homebuyers receive financial help from the “Bank of Mom & Dad” to qualify for a mortgage. The surveys further show 78% of Gen Z homebuyers received down payment help.

Roughly 70% of heirs sell the family home upon the death of their parents. Since the home is inherited at the current market value (stepped up basis) the heirs can sell the home with paying capital gains taxes. Another 12% of heirs move into the family home. The other 18% use it as a vacation home, rent it for income, or gift it to a designated charity. So, even though the actual house is seldom passed from one generation to the next, the equity in the home can be passed tax-free from one generation to the next.

Key Roles of a Realtor Experienced with Inherited Property

Using a realtor who is experienced with inherited property is recommended for heirs to help them navigate the emotional and logistical complexities of the probate process and maximizing market value of the property. A probate realtor acts as a liaison between multiple heirs, arranges for ongoing maintenance of the property, coordinates vendors to prepare the property for sale, and effectively coordinates appropriate resources to manage the transaction.

• Navigate probate – A realtor who understand the probate process will understand the need to wait for the judge to appoint a personal representative who is authorized to act on behalf of the estate and execute a listing agreement. Probate may take six months or longer.
• Acquire documents – Many homeowners transfer title to their assets into a trust or other entity for estate planning purposes. The realtor will encourage the heirs to seek appropriate legal advice before executing a listing agreement. The court will appoint the trustee or personal representative to represent the estate unless the property has passed to the heirs. The realtor will direct the heirs to gather appropriate documents: warranty deed / title to the property, trust documents, death certificates, leases, mortgages and liens, survey, homeowner’s association contact, and other information necessary for escrow and closing.
• Managing multiple heirs – When the realtor has been engaged to represent the estate it will become necessary to manage disagreements: timing of sale, compensation, listing price, marketing strategy, and negotiating offers. Ultimately, the real estate agent must have unanimous consent to list the property for sale. If one heir refuses, a lawyer will need to be consulted. If an estate is in probate, the executor may have the authority to sell the property without consent of all heirs.
• Complicating factors – It may be necessary for the realtor to manage tenants or friends of the deceased who live in the property, coordinate an estate sale and disposition of personal property, and reach understandings with family members who are licensed real estate agents.
• Educating the heirs – Since the prospective buyers in the current market actually determine what the property is worth, the realtor must thoroughly educate the heirs about the process and attempt to manage emotions and unrealistic expectations prior to listing the property. Once the listing price has been established by the heirs, and they calculate their anticipated inheritance, it often becomes difficult for some of them to accept the reality of the market. Heirs should be prepared to accept 20-30% less than appraised value of the property due to deferred maintenance and other issues related to selling an inherited property.
• Preparation and marketing – Many times heirs are not financially prepared to invest in the appropriate preparation and marketing of the property. An important distinction is that “as is” doesn’t mean in its current state. Providing the heirs with a price range and terms will help them understand the relative value to offers. Explaining the various expenses for preparation, marketing, and anticipated closing costs is essential to keep multiple heirs aligned with the primary goal – to attract multiple offers for a reasonable price within the shortest period of time.
• Prepare for the Sale – A professional appraisal (Broker’s Opinion) should be obtained to establish the fair market value of the property. Conducting a title search very early will identify existing mortgages, tax or mechanical liens, and other debts attached to the property. Heirs must determine how the property will be maintained and where the funds for mortgage payments (property taxes, insurance) and utilities will be paid until sale is finalized.
• Managing the transaction – Ideally, the heirs will agree to engage the services of a real estate agent with expertise in probate sales. Since residential real estate transactions often involve several stages of negotiation, and timely responses are usually necessary to keep transactions moving forward, an efficient decision-making process should be established prior to listing the property for sale. Disagreements among heirs regarding marketing costs, the acceptance of offers to purchase, and subsequent requests for concessions will seriously complicate the transaction process.
• Closing Documents – The Settlement Statement should be reviewed by the heirs a few days prior to closing so all questions can be answered regarding the expenses and the net proceeds. The heirs must complete a Seller Information Form for the Escrow Officer so they know how the proceeds will be distributed. This is also a good time for the heirs to review the Wire Fraud Warning. Arranging for all the heirs to sign the necessary documents on the closing date should be managed weeks in advance. It is very difficult, if not impossible, to change the closing date stipulated in the contract at the last minute.
• Distribution of Proceeds – The transaction is not complete until the buyer’s funds have been successfully transferred into the respective accounts designated by the heirs. The Escrow Officer is responsible for paying all mortgages, liens, closing costs, brokers’ compensation, taxes and other debts stipulated in the Settlement Statement.

Disagreements Among Heirs

Due to the significant amount of equity in many luxury properties it is not unusual for disagreements to arising among heirs. This is especially true if the estate lacks funds available for preparing the inherited property for sale and one or more heirs refuse to contribute their share of funds to cover expenses.

Whenever the real estate consultant is not able to resolve these disputes, it will be necessary to engage the services of a mediator to avoid the expense and delays associated with litigation. A lawyer may be hired to make a structured sale possible.

Emotional Challenges

Oftentimes heirs mistakenly view an inherited luxury home, and the considerable amount of equity it represents, as an impending windfall. When the reality that this anticipated windfall is the consequence of a deceased parent or loved one, various emotional challenges tend to emerge:

• Grief and loss.
• Sentimental attachments.
• Guilt and regret.
• Sell or Rent
• Unresolved family conflicts
• Transactional stress and anxiety
• Fear of making poor decisions
• Pressure to preserve a legacy
• Emotional paralysis
• Invasion of privacy
• Coping with conflicting values

This process can be especially difficult for heirs who are family members. It will be important for them to find a trusted real estate consultant who can patiently wait for them to resolve their emotional challenges before they embark on the path toward listing the home for sale. As George explained in his book, Because Dreams Deserve an Exceptional Home, one of the most important steps in the process is for every home seller is to become emotionally detached from the home.

Family members must keep in mind that this house became their home through the intangible feelings of love, security and comfort. The personal touches, shared experiences, and sense of belonging created lasting memories. Confronting the fact that “their home” will no longer be the gathering place for holidays and birthday celebrations will take more time for some heirs to process than others.

Selling an inherited property is also challenging due to the complicated probate process, managing family disputes over the sale, and handling the emotional attachments of some heirs to the home. The major issues faced by heirs are: significant costs of deferred maintenance, high carrying costs, and unexpected tax or mechanical liens.

Generational Wealth

A simple financial analysis of the costs of homeownership demonstrates that very few parents actually become wealthy because they purchased a luxury home. Their costs for mortgage interest, property taxes, insurance, maintenance and renovations total at least three times the original purchase price of the house. Generational wealth is created for the next generation when they inherit the house at the stepped-up basis (tax free) and convert the house to a rental property, or sell it an invest the proceeds into a home for themselves, which they can eventually pass on to their children.

Our team at Wessberg Luxury Properties Southlake is ready, willing, and able to patiently assist the heirs of an inherited property. In addition to his extensive real estate education and experience managing their family rental properties, George Wessberg also completed Bryant University’s two-year financial planning curriculum. So, he is prepared through rigorous education and personal experience to help family members who inherited a luxury home make informed decisions about whether to sell the property or convert it into a rental property for themselves and future generations.