The Entropy of Home Equity: The Tale of Cash on the Sidelines

Welcome to the Investor-Agent Real Estate Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education
• - The Saga of “Cash on the Sidelines”
• - The Entropy of Home Equity
• - The Greatest Wealth Transfer Ever
• - * Tangent * - School Administrators are Ballooning!
• - My Skeptical Take

The Weekly 3: News, Data and Education to Keep You Informed

1. Do institutional investors drive up single-family rents more than smaller investors? The data suggests no; and in fact, it's currently the opposite (Parsons).
2. We have successfully launched the largest rocketship to space. Then returned it, by catching it with giant “Godzilla” arms. Simply astonishing. We can build anything! If they let us ().
3. The Era of Abundant Energy is Coming. First microsoft, now Amazon and Google are inking nuclear power deals. Amazon now aims to bring 5 GW of new power projects online across the U.S. by 2039 — the largest commercial deployment target of Small Modular Reactors to date (GovNuclear).

Today’s Interest Rate: 6.62%

(flat, from this time last week, 30-yr mortgage)

Guten Morgan investors. It’s a lovely day to talk real estate. Let’s get into it.

The Saga of “Cash on the Sidelines”

There’s a lot of talk in the press about how “cash on the sidelines,” is accumulating, ostensibly staging to be deployed into the market, like an ocean of water building up behind a tremendous dam.

Much of this reasoning is based on the growth in funds in money market accounts and household deposits, which admittedly, has become sizeable.

** (And stay with me, this will circle back to real estate). **

Money market funds now have more than $6.5 trillion invested in them.

Additionally, “sidelined” cash, in the form of household deposits, has also accumulated a sizable position, like a big fat trust-fund baby.

** Side note: look at that government over-intervention during COVID, I wonder why we have inflation now? Sheesh! 😬

Cash on the Sidelines is Actually Not Growing

The implication of saying “there is a lot of cash on the sidelines” is quite misleading.

True there is more money sitting in these proverbial buckets.

However, these figures only count the numerator in the equation. An ever-increasing nominal level of cash is not a new phenomenon and both of these regularly hit record highs, as they should. We have more people and businesses, as the global economy continues its growth.

So the real question/figure should be: what is the amount of cash building up as a share of total $ invested in the market?

And that number has been constant.

Essentially cash still makes up about 15% of total investments, for the last 20 years. Even during the wild government spending and stimulus in 2020-2022, we had just a few % fluctuation.

Aptus

Of that, 15%, money market accounts and checkable deposits are up, but only as a share of total cash. This is pronounced in the last 4 years, as historically high interest rates provide some additional mailbox money. But cash is always meandering in and out of liquid holdings, and has still stayed relatively fixed as a % of invested capital. Thus, there isn’t some massive pool of unspent money on the sidelines waiting to flood the market and drive up prices suddenly (which is what I think we all picture when pundits are quoting these numbers). But it does make for juicy, salacious headlines.

So are there other surprises around the corner we can look to?

What about Personal Debt and Credit Cards!? Looks bad!

I also see the talking heads on the Tele spouting off about personal debt and credit cards rising.

Oooooooo Spooooooky… I mean, it is almost Halloween, so it’s perhaps apropos. But as we just saw in the above, the devil is in the details.

True, personal / credit card debt is up.

But again that’s just the nominator in the equation. Let’s look at it now as a % of personal income.

We obviously had a crisis during the Great Financial Crisis. But now we are back to historical levels. Average folks are actually richer today, and income and savings have risen considerably, especially in the last few years. Thus, so far, not a systemic/market concern.

The Entropy of Home Equity: The Real Sidelined Cash

I have perhaps a much more interesting/actionable ‘cash on the sidelines’ figure that is more actionable for us real estate investors. And it’s tremendously bullish.

Actually, I have two:

1. Home Equity
2. Transfer of Generational Wealth

Let’s dig in.

1) Homeowner Wealth and Home Equity has Balooned with Home Prices

There is an upside to home prices escalating so drastically in the last ~4-10 years. If you own one, the value of your home’s equity has absolutely skyrocketed.

In fact, home equity has popped roughly 75% or ~$16 trillion in just the last 4 years.

That’s real cash money folks. And it’s yours for the taking.

This phenomenon also makes folks feel richer today, and many will likely soon take action, starting when rates move lower this Spring and into 2026.

Some will sell, and some will refinance, to access that cash.

But what will they do with it?

Spend it (and diversify their investing).

They likely won’t boost their cash holdings (as we saw in the historical chart).

The amount of home equity that could be tapped and injected into the market in the coming years is several multiples that of deposits and money market accounts, likely more than $20 trillion.

Wow.

But wait, there’s more….

2) The Greatest Generational Wealth Transfer Ever

Move over home equity, and hold my beer please. It’s time to talk generational wealth, and this one’s a doozy.

Roughly 73 million Baby Boomers and Silent Generation folks will transfer ~$84 trillion to the younger generations over the next 20 years (Gen X, Millennial, Gen Z).

Yes, you heard that right. $84 trillion!

That means Boomers alone hold roughly half of all wealth in the US, which currently sits at $140 Trillion.

Now that’s some serious economic entropy. 🚀🚀🚀

Now while an estimated $10-$12 trillion of that will go to charity (and is hopefully well spent) the rest will go to heirs, minus taxes (although most of this transfer will not be taxed).

What will the younger generations do with all this wealth?

Well, much of this wealth is in the equity of a home. And once younger folks inherit those (mostly) older homes, they will - in my opinion - sell them.

Younger folks don’t want those homes and they want access to that cash money to do as they please, and it’s tied up in home equity. They will be able to buy the home they want in the city they want, and then some. Travel, education, life expenses, debt payoff etc… this wealth transfer will be spent one way or another and will contribute to a long term bull market in real estate and in equities, in my humble opinion.

This money will not be saved or deposited (as we saw earlier). It will be put to work, in one way or another.

Buckle up bulls!

Tangent

Do you know what has also ballooned? Absolute waste in public schools.

The number of administrators has DOUBLED since 2000, but the number of students has grown just 5% comparably (the same is true in the Harvard’s of the world too).

What an absolute waste, and this cost ultimately falls on the backs of our children. We may not really need more school funding, frankly (and I am a huge proponent, happy to pay more in taxes if needed).

We need to cut the fat.

This chart infuriates me!

Whew ok. I feel better now. I’m good. You good? Let’s bring it home here.

My Skeptical Take:

If you hear someone on CNBC etc… making a bullish call for markets because of “cash on the sidelines” or bearish calls because of personal debt/credit cards, your Skeptical spider sense should start to tingle.

It’s not cash, it’s real estate and the coming generational wealth transfer, that will catalyze the bull market forward long term.

Homeowners and heirs are going to liquidate that capital and put it to work how they see fit. Homes are like a prison for all that cash, just sitting there on a life sentence. I think most will sell (and yes refinance) to access that cash.

Real estate activity for the next 10+ years will be extremely vigorous.

And we don’t need to wait for a proverbial dam to break; this transfer has started. Boomers are “giving while living” by transferring assets/purchasing property, repeating tax-free cash transfers, business/estate/trust planning, etc…

In all, there exists more than $100+ trillion in sidelined/suppressed/bottled up/ bridled/explosive “cash” gearing up to enter the market, starting next year and continuing for 20 more years.

Let me say that again, $100 Trillion!

Now that’s a lot of pent-up liquidity looking for a new home, pun intended 😊.

Position yourself and your family accordingly.

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-Andreas

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** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and do not constitute financial advice.