SouthernWorldwide.com – Homeownership has long been considered a fundamental aspect of achieving the American Dream, primarily because it consistently helps individuals build wealth. However, recent research indicates that the likelihood of eventually owning a home may be influenced by a factor that is beyond an individual’s control: the financial standing of their parents.
To investigate the elements that contribute to what economists term “wealth mobility,” a team of researchers from the U.S. Census Bureau and Carnegie Mellon University undertook an extensive analysis. They examined IRS tax records, Census data, and property ownership records pertaining to 3.4 million families.
This analysis then focused on the children born into these families. Specifically, it tracked individuals born between 1978 and 1986, encompassing the younger cohorts of Gen X and the youngest millennials. The study determined whether these individuals were able to purchase a home between 2019 and 2021, when they were between the ages of 34 and 42.
The Bank of Mom and Dad
A significant discovery from this research was that homeownership appears to be more closely tied to parental wealth than to an adult’s income, particularly in housing markets characterized by high costs. The study found that even individuals who experience substantial income growth throughout their careers are less likely to own a home if their parents were renters, compared to those whose parents owned homes.
Max Risch, a co-author of the study and an economist at Carnegie Mellon University, explained to CBS News that “Even if children grow up to earn about the same amount as adults, those with wealthier parents have higher homeownership rates and more valuable homes when they do own homes.”
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He further elaborated that “The opportunity to achieve this American dream is more dependent on how wealthy your parents are than we might like.”
While economists have historically concentrated on income mobility, including notable research by Harvard economist Raj Chetty, Risch pointed out that wealth mobility has received less scholarly attention. This new study suggests that income mobility alone does not fully account for economic outcomes, as wealth, which tends to be passed down through generations, shapes opportunities in ways that earnings alone might not.
The Meaning of Opportunity
The researchers did not delve into the specific reasons why children of homeowners are more prone to becoming homeowners themselves. However, Risch suggested that parents who own homes may possess greater financial flexibility to assist with down payments or offer other forms of support.
The disparity in wealth between homeowners and renters is substantial. Data from the Federal Reserve’s most recent Survey of Consumer Finances reveals that in 2022, homeowners had a median net worth of $396,000, in stark contrast to the $10,400 reported by renters.
Wealth can significantly impact a family’s capacity to purchase homes, fund higher education, or leave behind an inheritance. Risch emphasized that a high income alone may not be sufficient, especially in property markets with elevated prices.
“When we think about opportunity, we should consider not only income and earnings, but the opportunity to purchase a home to build assets — maybe purchase the type of home that you wanted that gives you other opportunities to build wealth,” he added.
Geographic Tradeoffs
The study also examined variations in wealth mobility across different geographic areas. It found that it is more challenging for children from lower-income backgrounds to become homeowners in expensive U.S. regions, including certain parts of California and major cities like Boston, New York, and Seattle.
Conversely, wealth mobility appears to be strongest in areas located in the Midwest and Southeast, where home prices are lower and housing inventory is more abundant, according to the new study.
These findings highlight a difficult choice many Americans face: relocating to pricier cities that offer more robust job markets and higher salaries, or remaining in more affordable regions where homeownership is more attainable but professional opportunities might be more restricted.
“These are pretty hard trade-offs,” Risch commented. “It might mean you have to live in a place that wasn’t necessarily the place that you want to live — you have to rent for longer than you would like — to continue access to that income.”
Risch noted that the significant increase in housing prices since 2021, which falls outside the study’s timeframe, suggests that parental wealth could become an even more critical factor for homeownership moving forward.
“House prices are growing faster than median incomes, and we find that when these house prices are increasing faster, it increases this intergenerational inequality of housing,” he stated. “It could get worse.”
