Beating the generational money curse: How homeownership builds your family’s wealth

Just about every parent wants to provide their descendants with the means to live comfortably, grow and prosper. But for many families, achieving financial stability that lasts across generations can feel like chasing an elusive dream. They may not realize that a prime way to catch that dream lies in one word: property. And, in particular, a home.

“Real estate is usually one of the largest assets the average person will own,” says Maxine Teele, a Bronx, NY-based licensed real estate agent with Keller Williams Realty. “And such a large asset appreciating over time typically results in huge profits, which, if used correctly, can positively impact the next generation’s wealth.”

In other words, your residence can be a key financial resource for your family. Buying and maintaining a home builds an equity (ownership) stake you can pass down to your heirs.

Here’s why and how home equity is important — and how it can become the cornerstone of your family’s generational wealth.

Generational wealth and homeownership statistics

Why is home equity important?

Home equity is the portion of your property that you actually own outright. It represents the residence’s current market value minus any outstanding mortgage debt.

When you borrow to buy a home, your initial equity stake equals your down payment — the amount of money you directly contributed towards the purchase, instead of financing. Over time, your home equity increases in two primary ways: by a decrease in the mortgage debt, and by a rise in the property’s value.

“Your equity grows as you make mortgage payments, thereby reducing the mortgage balance, and as your home’s market value climbs due to factors like home improvements made or neighborhood enhancements as well as overall real estate market trends,” explains Matt Dunbar, senior vice president of the southeast region for Churchill Mortgage. “Your equity slice of homeownership is crucial, as it’s not just a theoretical figure – it translates into real financial potential, an asset that can be borrowed against or sold for profit.”

You can tap home equity in various ways — in the form of a home equity loan, home equity line of credit, or cash-out refinance of your primary mortgage — often at better interest rates than personal loans. Your equity can also net you a tidy profit when it’s time to sell your home.

Home equity “is often the primary source of wealth for many homeowners,” Dunbar adds. And for their descendants — if the property (or proceeds from the property) remain in the homeowner’s estate.

Using home equity to build generational wealth

Generational wealth refers to assets that are passed down from one generation of a family to the next. It can take any form: stocks, bonds and other investments; family businesses; bank and financial accounts; and tangible assets like art, precious metals — and real estate.

“It’s possible to build generational wealth via home equity largely because it requires only two actions,” says Robert Johnson, a professor of finance at Heider College of Business, Creighton University. “First, the homeowner must make regular mortgage payments, thereby lowering their mortgage balance, and the homeowner must resist the temptation to borrow against the accumulated home equity if possible.”

The gradual way in which home equity accrues makes it an ideal long-term wealth-building vehicle. “A monthly mortgage payment is often considered a forced savings account,” as National Association of Realtors (NAR) Chief Economist Lawrence Yun once characterized it. Plus, property tends to appreciate over time. While housing markets do have their ups and downs, “it’s very rare to see real estate go to zero in value,” says Steven Orlowkski, certified financial planner and founder/CEO of Orlowski Financial, a New Jersey-based financial services firm.

“Real estate is one of the best ways to build generational wealth simply because unless you really do something just unimaginably foolish, you’re going to have residual value,” he adds. “If you do it right, you invest in the right areas and you try to get into growth locations, then you will be able to have a tangible asset that you can pass on to successive generations.”

Helping younger generations through home equity

Inheriting a home has several economic benefits, offering a variety of options and giving a valuable head start to younger generations, especially nowadays when house-buying is becoming increasingly expensive — a six-figure-income proposition, as Bankrate’s April Housing and Income Study found.

Not surprisingly, 78 percent of Americans who don’t own a home but want to, cite affordability reasons as holding them back, according to Bankrate’s most recent Home Affordability Survey. Not having enough income (56 percent), home prices being too high (47 percent) or not being able to afford a down payment and closing costs (42 percent) are the specific factors they cite. Even less surprisingly, these sentiments are especially strong among the youngest age groups, Gen Zers (18-27) and Millennials (28-43).

So, bequeathing a home “not only gifts an appreciating asset but it also shields heirs from the escalating expenses of homeownership in dynamic real estate markets,” says Dunbar. “With an inherited property, descendants can choose to sell the home or live in it as a primary residence and leverage the home’s equity for financial ventures or emergencies. Furthermore, the property can offer a potential source of passive income if the heirs decide to rent it out, and it may provide some tax advantages, too.”

Passing down home equity can also improve bonds between generations: affection for the old family homestead, and appreciation for the efforts predecessors made to acquire and maintain it.

Building home equity in 2024

Over the past five years in particular, American homeowners have observed a significant increase in home prices and values leading to a record increase in home equity. This growth is largely due to various factors influencing the housing market.

The housing market’s persistent low supply and sustained demand dynamics continue to exert upward pressure on home values — and thus, the worth of homeowners’ equity stakes. In fact, the number of financed homes that are underwater — worth less than the mortgages on them — continues to fall nationwide. According to ICE Mortgage Technology (ICE), while fewer than 390,000 borrowers had underwater mortgages, homeowners with mortgages ended the first quarter of 2024 with a record $17 trillion in equity.

“When you look forward to late this year and into 2025, expectations are that the Fed is going to start to ease rates,” says Andy Walden, vice president of enterprise research strategy at ICE. “That has a direct impact on the interest rates that are being offered out there on lines of credit. You should start to see it become a little bit more affordable and more attractive to utilize some of this record equity out there in the market.”

The higher costs of mortgages and homeownership are causing many prospective buyers to wait things out in the hopes that prices and interest rates come down. However, if you are really ready to own a home, there’s a risk to postponing a purchase — and not just because the inflated costs may be the new normal.

“It can mean missing out on potential home equity growth,” says Shawn Malkou, managing broker with X2 Mortgage of Chandler, AZ. “Despite current market conditions, homeownership will almost always be a valuable way to build wealth over time. The sooner you can get into the homeownership game, the sooner you’ll be able to start building wealth.”

Dunbar agrees. “Delaying could mean confronting even steeper home prices down the line, consequently stalling the advantages of homeownership and the potential for wealth accumulation that could benefit future generations,” he says.

How to pass down property

There are different ways to transfer your home and its equity, to your chosen heirs. Here are the most common options.

Wills

A will designates the beneficiaries of the property and provides instructions for your named executor to distribute your assets when inheriting a parent’s house. On the downside, wills must go through probate court, which can be costly and take time. And because a will is a public document, it provides less privacy.

Trusts

A legal entity that you create, the trust essentially takes the title to the home, then distributes ownership to your designated beneficiaries on your death or a specified date. Trusts let you distribute your home more easily and privately without the hassle of probate court; they also help you reduce or avoid gift taxes and, if they are irrevocable, estate taxes too. Homeowners in particular can opt for a qualified personal residence trust (QPRT) to bequeath a primary residence or a vacation home. The owner can remain living in the home until a predetermined end date, upon which title is transferred to their beneficiary.

On the downside, creating a trust can be expensive — you need a lawyer to make sure everything is set up properly and worded precisely. QPRTs are especially complicated: The end date must be set carefully or estate taxes could be triggered after all.

Co-ownership/Joint tenancy

An alternative method to pass on property to your heirs is joint tenancy, a form of co-ownership. Although co-ownership is usually established when you buy a property, it can also be done later. Basically, this procedure means putting your heirs’ names on your deed. Full ownership of the home then transfers to them when you pass away.

The plus side of this approach is its immediacy: Again, you bypass probate court and your heirs have instant control of the home. The downside: Making the heir a co-owner means they must agree to a sale, refinance or other transaction that affects the home. Also, there may be gift tax consequences for the original owner and the heir may pay more in capital gains taxes if/when they sell the property.

Transfer on death deed

Instead of adding a co-owner to a deed, you can create, sign, and record a transfer on death (TOD) deed, or a TOD designation to a deed. With this action, you’re designating a beneficiary to the home, as you would for an insurance policy or an investment account; upon proof of your death, it goes immediately to the beneficiary. The pros of TODs include its efficiency and avoidance of federal gift taxes. Unfortunately, many states don’t allow TOD deeds.

Home equity, generational wealth and redlining

It can be harder for minorities, people of color and those living in certain areas to create and pass on generational wealth. One reason why directly relates to redlining, a mid-20th century real estate practice. Public and private housing industry officials and professionals designated certain neighborhoods as high-risk, largely due to their racial demographics, and denied loans or backing for loans on properties in those neighborhoods.

Even though the Fair Housing Act of 1968 outlawed redlining, its legacy persists, affecting homeownership rates, home values and the financial assets of the targeted groups and their descendants. Many economists and social historians attribute much of the ongoing racial wealth gap to the practice and the way it effectively left minority families behind in the asset-appreciation sweepstakes.

Redlining’s impact lingers partly because often “a home or property may be the only asset that a family [of color] can pass to the next generation,” in contrast to a white family who has “investments, business interests and a whole assortment of other assets,” says Kenneth Chavis IV, senior wealth counselor at Versant Capital Management, an Arizona-based wealth management firm. So, “the importance is much greater for Black families to own homes and … start the ability to have generational wealth within their family lines.”

Challenges of passing down property

Johnson cautions that purchasing residential real estate and building home equity doesn’t necessarily guarantee a foundation for a family fortune. “I believe there are better ways to build generational wealth: specifically, investing in a diversified stock portfolio,” he says.

Certainly, passing down property can be problematic. “Among the primary issues are the potential estate or inheritance taxes incurred based on the property’s valuation,” Dunbar says. That can be true of any asset, of course, but “additionally, unresolved liens or mortgages on the property can further complicate the handover process.” Inheriting a house with a mortgage can especially be burdensome to heirs, if they’re not in a position to assume the debt. “Moreover, older properties might require substantial maintenance or renovations, adding further challenges for the inheritors,” he notes.

Then there’s the problem of liquidity. Home equity wealth can’t easily be shared or divvied up among multiple owners, the way cash or stocks can.

“Maybe there are multiple siblings, multiple beneficiaries that would inherit the property. ‘How do we determine what we want for this property?’” asks Chavis. “Maybe one or two of us want to keep it. Maybe one or two of us want to sell it for various reasons. That can lead to some conflicts and challenges. You potentially have to go through a legal process if they can’t agree amicably. “Of course, “A lot of that can be mitigated with proper estate planning.”

Bottom line on home equity and generational wealth

“Real estate is one of the pillars to wealth,” says Teele. “It’s an asset that appreciates over time, and that appreciation minus any debts on the home is attached to the home and not the owner. So when the asset – meaning your home – is passed down from one generation to the next, the home equity is now theirs.”

Time is of the essence. “If buying a home stretches a budget to the point of constant financial stress, it might not be the right move,” says Malkou. “However, potential homeowners need to understand that the longer they own a home, the more affordable it will become and the quicker their home equity should grow.”

No investment is perfect, of course: A home’s illiquidity can make it a hassle for inheritance. Still, “the enduring value of real estate and the track record of homes appreciating over time make it a powerful tool for wealth creation,” Dunbar states. “By building equity and leveraging the financial perks of owning property, you can establish a solid foundation for long-term prosperity.”