How Housing Wealth Really Flows Through Generations: Study

House on a stack of money

What You Need to Know

A new NBER report finds that parental housing wealth gains experienced during early childhood are associated with higher future wealth.
Notably, higher earnings and educational attainment only partly explain the higher future wealth estimates.
The authors say their big conclusions highlight the role of parental behaviors in driving the intergenerational transmission of wealth.

While households have a variety of means to generate wealth over the long term, from wages to the stock market, perhaps no wealth-building mechanism is as broadly utilized by Americans as the housing market.

The fact is that housing wealth is far more evenly distributed across the population than are other forms of financial wealth such as equities or direct business investment, and for all but the wealthiest households, the main source of wealth is their home.

This is why a new analysis published by the National Bureau of Economic Research seeks to elucidate some key questions about the ways evolving levels of housing wealth (and volatility in the housing market itself) contribute to the intergenerational transfer and building of wealth.

Specifically, the researchers ask what long-term financial effects that lower and more volatile amounts of parental housing wealth have on children once they reach adulthood.

At a high level, the researchers find that large fluctuations in home prices during the housing boom and bust cycle are indeed likely to meaningfully affect wealth accumulation among the next generation, who were young children during this period.

The authors of the paper are N. Meltem Daysal of the University of Copenhagen; Michael Lovenheim of the Brooks School of Public Policy at Cornell University; and David Wasser, a researcher and labor economist at the U.S. Census Bureau.

According to the trio, the main results “indicate that parental housing wealth shocks [that are] experienced during youth are passed through to children, but that the transmission happens differentially based on the age of the child when the shock occurred.”

As the paper explores, while parental housing wealth gains in early childhood are primarily reflected in higher housing wealth of children, wealth gains during middle childhood affect both adult children’s housing and non-housing wealth. In contrast, the researchers find no evidence that parental housing shocks during children’s teenage years affect later-in-life wealth outcomes.

The authors say their results have a variety of practical implications for families, financial professionals and policymakers. First, from a policy perspective, they suggest that policies that support wealth accumulation of parents, especially parents of young children, will foster higher wealth accumulation among children as they age.

Second, their “preferred interpretation” of the results highlights the role of parental behaviors in driving the intergenerational transmission of wealth. These behaviors could be independently targeted by policy interventions, for example by helping develop financial literacy, the authors argue.

Housing Wealth Transfers by the Numbers

According to the authors, the results of the analysis suggest that parental housing wealth changes during childhood are differentially passed on to children later in life based on the age at which the wealth change occurs.

For overall wealth, the authors explain, the largest effect is seen with housing wealth changes occurring during early childhood (before the age of 5), and middle childhood (between the ages of 6 and 11).

In the former case, the authors find that about 27% of increased housing wealth is passed onto children in the form of higher total wealth in adulthood, whereas about 25% of the increased wealth is passed onto the next generation when it is generated during middle childhood.

Digging deeper into the results, the authors find that parental housing wealth gains during early childhood are only transmitted to children’s future housing wealth, with nearly 25% of added parental housing wealth gained during early childhood being transmitted to the child’s housing wealth at ages 29 to 33.