Wealthy Millionaires – A wealth of common sense

The amount of wealth created in the housing market this decade is staggering.

The equity of all American homes has nearly doubled from $19.5 trillion at the end of 2019 to almost $36 trillion today. The $16 trillion gain over the past six years is more than the total amount of home equity in 2017.

The combination of a housing and stock market boom means that American households have never been as wealthy as they are today. We’ve made a lot of millionaires this cycle.

According to BloombergThere are now more than 24 million millionaire households in America, which amounts to about 1 in 5 households. A third of this group has become millionaires in the past eight years.

The problem is that most of that wealth is illiquid. Instead, it’s usually tied up in a home or retirement account. Bloomberg explains:

Despite this relative prosperity, today’s millionaires rarely have even a million dollars to spend as they please. For the barely millionaires, households with a net worth between $1 million and $2 million, the vast majority of that wealth is illiquid. By 2023, they typically had 66% of their wealth tied up in a primary home and retirement accounts, an increase of eight percentage points since 2017.

To spend freely, millionaires usually have to be a lot richer. Households with $5 million or more had about 24% in easier-to-access bank or investment accounts in 2023, compared to 17% for households closer to the $1 million mark.

You need to increase the wealth scale a fair amount until the liquidity profile changes substantially, making your wealth easier to access.

Here’s the visual:

No one should feel sorry for these paper millionaires. This is a first world problem. A net worth of $1 million still puts you in the top 18% of U.S. households (and the top 1% globally). A million isn’t what it used to be, but relatively speaking it’s still a large amount of wealth.

The downside to being house-rich and essentially having your portfolio locked up in retirement accounts is that that may not be the case feeling very rich.

When you think about it, housing is one of the most difficult forms of wealth. It is an illiquid asset. There are countless frictions and costs associated with buying or selling. There are additional costs.

It is also not easy to tap into your assets. Your options look like this:

• You can open a home equity line of credit or do a cash-out refinance, but that will require you to borrow more money.
• You can use your equity as a down payment for a new home, but that also means that you have to pay the now higher house prices.
• You can sell your house to downsize or become a renter, but you will always have to live somewhere.
• You can get a reverse mortgage in retirement, but it’s a complicated process.
• You could live somewhere else and rent out your home to generate some income, but there are still a lot of costs and potential headaches associated with that process (and again, you have to live somewhere).

Obviously, being housing rich is much better than housing poor, but you need to understand this dynamic if you’re trying to build wealth. Building wealth in a house is easier than using it.

You can take your money out of your retirement account early, but doing so may require penalties and taxes. You have to be patient if you have illiquid assets. That’s the disadvantage.

On the other hand, this is a good thing for most people!

When you are essentially forced to hold financial assets for the long term, that is how you build wealth. It allows more compounding. It reduces taxes, fees and possible mistakes you may make when making unnecessary transactions.

One of the biggest financial benefits of owning a home is the fact that it is a form of forced savings. That’s why a home is by far the largest financial asset for most middle-class people.

If you’re a millionaire and have most of your wealth in your home or retirement accounts, it may not feel like you’re very rich right now because you can’t actually spend that wealth.

But this only means that you will be richer in the future because You can’t spend that money now.

You are incentivized to leave your money in your home and tax-deferred retirement accounts.

This is a good thing for your future net worth.

Michael and I talked about the problems of being rich and much more in this week’s Animal Spirits video:



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How to Make Money in Real Estate

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