Home Ownership vs. How the Wealthy Actually Diversify

For most middle-class households, a home is often their biggest asset. Government survey data, like the Federal Reserve's Survey of Consumer Finances, shows that home equity usually makes up a large part, often the largest, of a typical household's net worth. For wealthier households, the picture looks different. Surveys often reveal that business equity, publicly traded stocks, and other financial assets make up a much larger portion of their total wealth. In fact, many categories covered in this platform's Alternative Investments module tend to represent a bigger share of wealth than primary residence equity, which can become a small, almost incidental part of a more diversified overall picture.

This isn't to criticize homeownership. It’s been a solid wealth-building tool for many households. Homeownership allows for forced savings through mortgage paydowns and potential long-term price appreciation in many markets. This comparison specifically addresses concentration and diversification, a theme we explore further in this platform. When a large share of total household net worth is tied up in one illiquid, location-specific asset, that household's finances can become vulnerable to conditions in one local real estate market. This represents a real diversification risk, even if real estate has historically performed well on average across the broader market.