Home equity beats stocks

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In 1995, US households held similar amounts of assets in home equity and corporate stocks: US$ 4.3 trillion in stocks and US$ 4.7 trillion in home equity.

See: Federal Reserve Flow of Funds Table B100.

Over the decade, the situation changed dramatically, so that by 2004, households held US$ 4.8 trillion more in home equity than in corporate stocks, as the graph shows.

Home Equity vs. Stock Holdings

This difference came about because of the crash in the stock market in 2000-2001 and because of the steady increase in home values throughout the decade.

Low interest rates and easier terms on home mortgages pushed prices of residential real estate upwards.  Although mortgage rates were often variable, monetary correction was not applied to mortgage principal — causing the value of home equity to soar along with prices of residential real estate.

On the other hand, households favored mutual funds over direct investment in corporate equity, while massive use of executive stock options and equity buybacks restrained the growth of direct holdings of corporate stocks by households.

Note: ‘Home Equity’ is calculated by subtracting home mortgages from the market value of residential property owned by this sector.