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Lifecyle of Equity Development

Years ago working on a project for Ameriprise, we looked into the dynamics of equity creation from home ownership. Equity development followed a very predictable path (the black line) and started when the person bought their first house. The 'value' of the equity isn't mapped here as that's relative to the size of the house, the market growth, etc.

We knew from census data that the average person owns a minimum of three houses in their lifetime - traditionally: the starter home, the family home and the retirement home.

Over time the (black line) always went up because the mortgage is paid off and the house value grows. This is still true today, if you look at any extended period of time, the black line always goes up. If you have multiple houses you have multiple black lines.

The growth afforded the house owner, was real wealth that was often omitted in the analysis done by their financial advisor. Many financial advisors leave real estate completely off the clients financial statement, while many more included it but didn't consider it a part of their overall financial planning. Ask yourself... do you consider the equity in your house as part of your wealth?

We could spend hours on this one slide (and we address it in more detail in our CLA course), but the initial trigger for that first house was often a first job, or marriage. What's important to consider are the ongoing life events. These are timed based on key stages of life, not interest rates. Marriage (or a future divorce) leads to a consolidation (distribution) of assets and housing, new jobs lead to moves and additions or remodeling, new children lead to additions, remodeling or trading up to the family house. College planning is a key process that often utilize home equity prior to the empty nest phase which then leads to remodeling, or shifts toward planning for the retirement home. Preretirement is a phase where planning is done and trading down or relocating is possible, or second or third homes are added as part of a larger solution. Retirement creates new lifestyle opportunities for additions, apartments (ADUs) and other restructuring and then in the final phase of wealth transfer there is gifting of real estate to children and charities.

Age 55-70 is a critical stage to understand as it's one of the largest shifts in wealth and lifestyle related to real estate. You could 'make a market' specializing in working with this age group to help them manage their real estate wealth. You may sell a bigger house to buy a smaller one while buying a beach or lake house and in the process. The client can shift major tax free wealth from the real estate to more liquid investments that can be used during the 'spending down' phase of retirement... while they create new 'black lines' that go up and leave wealth tax free to their heirs.

TIP: As a liability advisor, know that there are strategies and key times in which to identify ways you can help your clients through these stages. Also know that working with financial advisors you can help them to understand key strategies and approaches within these stages to help their clients: Manage Liabilities Into Assets™.

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