One reason the wealth gap keeps growing: Poorer Americans don't know when it's best to buy or sell a home

• An economist says the US wealth gap is growing as Americans navigate their investments differently.
• It's exemplified by the relationship poorer and richer Americans have with homeownership.

Buying a home can help you build wealth — but that doesn't necessarily mean becoming a homeowner will make you rich.

An analysis from Jung Sakong, an economist at the Federal Reserve Bank of Chicago, found that the US wealth gap continues to grow as Americans navigate their investments differently. This is exemplified by the differing relationships poorer and richer Americans have with homeownership.

The working paper suggests that in contrast to their rich peers, poorer Americans are more likely to purchase housing and make other investments when prices are high and sell when they are low, thus reducing their return in the long run.

Sakong wrote in the recent working paper that "wealth is distributed more unevenly than income." One reason behind this is that "richer households earn higher portfolio returns," more efficiently building on their existing wealth.

Building wealth is important because "wealth is a source of retirement income, protects against short-term economic shocks, and provides security and social status for future generations," the authors of an income and wealth analysis at Pew Research Center wrote. And homeownership can be a vital way to build wealth.

The authors of the Pew Research post noted — using data from the Federal Reserve's Survey of Consumer Finances — that "the wealth gap between upper-income and lower- and middle-income families has grown wider this century." Upper-income families grew their median wealth from 2001 to 2016, unlike lower- and middle-income families, which saw median net worths decline.

"The reason for this is that middle-income families are more dependent on home equity as a source of wealth than upper-income families, and the bursting of the housing bubble in 2006 had more of an impact on their net worth," the authors wrote.

The Chicago Fed economist noted in the working paper that government policies have "encouraged" homeownership for decades in part to help encourage the middle class to build its wealth.

"My findings caution government policies that encourage buying a home, however," Sakong wrote. "If such policies disproportionately incentivize home purchases when prices are high, they can backfire by impeding wealth accumulation and worsening wealth inequality."

Not everyone reaps the same benefits of homeownership

Buying a home is the biggest financial decision of many Americans' lives.

After all, a home purchase is still perceived as key to wealth building. As more Americans leverage homeownership as a means of wealth accumulation, their understanding of market fluctuations will determine their success.

"I think this work shows that less wealthy Americans are not enjoying the same return on housing as wealthier households do partly because the timing of their purchases and sales do not align with more opportune times in house-price cycles for many reasons," Sakong told Insider.

The economist examined households' trading patterns by wealth using surnames from the 1940 Census and deed records. Sakong noted that this Census was used because it's "the first Census to ask about income and is the last Census that is publicly available in full detail because the Census Bureau only releases a full Census after 72 years." Surnames from the 1940 Census were used to estimate wealth, as Sakong noted these names are passed down from one generation to the next.

Sakong wrote that he created a "panel data set on quantity of housing held by wealth levels," for this analysis. "I assign wealth levels to owners in the housing-deed records from CoreLogic by matching them by surnames to the average incomes of those surnames in the 1940 full-count Census. I derive approximations that translate the quantity-ownership patterns to return differentials."

Record-low mortgage rates have created a homebuying frenzy that has shifted the housing market's dynamics. Although rates have recently returned to pre-pandemic levels, buyer demand remains high. With a significant lack of homes available for sale, sellers are receiving multiple bids for their homes — with some buyers paying thousands over asking prices.

While this is bad news for prospective buyers, increased competition means the market is now in favor of sellers who are likely to see larger returns from their home sales.