Investors Have Been Quietly Buying Up Equity In Individuals' Homes - Is This The New Wall Street Housing Grab?

A new real estate-backed asset class has been quietly gaining traction among institutional investors and family offices: Home Equity Investments (HEIs). This novel approach to real estate investing allows investors to tap into the vast potential of the home equity market, which has grown to an astonishing $32.6 trillion as of 2024, according to data from TransUnion. As the market continues to expand, HEIs are poised for significant growth, offering opportunities for both homeowners and investors alike.

The concept is quite simple: an investor purchases an ownership stake in someone else's home. When a liquidity event occurs, like the home being sold, the investor captures the appreciation in their equity stake. 

This scenario is appealing to certain homeowners because they can receive cash for a portion of their home's equity without going into debt and taking on a monthly payment. The investor can capture the growth in property values without having to own or manage any properties themselves. 

The History of Home Equity Investments

While most retail investors haven't heard of HEIs, the asset class has been quietly developing over the past few years. In 2023, Morningstar DBRS, one of the largest credit rating agencies in the country, deployed the first rated securitization of HEI-backed notes, totaling $224 million. This move signaled the institutional legitimization of HEIs as an asset class, paving the way for further growth and mainstream adoption.

One of these rated securitizations was issued by Redwood Trust, Inc. RWT and the home equity fintech company Point. The venture issued approximately $139 million of rated asset-backed securities and closed the transaction on October 31, 2023. 

More recently, Unlock Technologies and Saluda Grade closed their second rated home equity agreement securitization. The $197 million transaction received an investment-grade rating from DBRS Morningstar. Its first rated securitization in 2023 was nominated by Global Capital Securitization for its RMBS Deal of the Year. 

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Morningstar’s Perspective on Home Equity Investments

Morningstar has taken notice of the emerging HEI market. In a recent primer titled “Home Equity Investments—A Primer,” Morningstar highlighted the potential benefits of HEIs for investors, noting their attractive risk-adjusted returns and low correlation to traditional asset classes. The report also emphasized the potential for HEIs to provide a new source of liquidity for homeowners, enabling them to access their home equity without taking on additional debt.

Morningstar DBRS Senior Vice President, Derek Moran, stated in the report, "Interest in this market is high and can be expected to continue growing, especially if interest rates remain high, and homeowner equity stays strong. Morningstar DBRS anticipates continued interest in the features of the HEI product as it is a diversified source of funds for homeowners, as well as an attractive source of returns and diversification for investors."

Why Investors Are Attracted to HEIs

A pool of HEIs acts like an index fund in that it can generate returns in line with the overall growth of the housing market. Investors see several benefits to this strategy, including:

Attractive Returns: HEIs have demonstrated the potential for strong returns, with some providers targeting internal rates of return (IRR) of 18% or higher.

Downside Protection: HEIs are typically structured with a built-in discount to the home’s appraised value, often in the range of 10-15%. This discount provides investors with a cushion against potential home value declines and prepayments.

Diversification: By investing in a portfolio of HEIs across multiple properties and markets, investors can achieve diversification, mitigating the risk associated with individual property investments.

The Perfect Storm for Growth

Several factors have converged to create a perfect storm for the growth of the HEI market:

Rising Home Equity: According to TransUnion, total tappable home equity in the U.S. reached $22.1 trillion in 2024, with other estimates putting the figure closer to $35 trillion. This vast pool of untapped equity presents a significant opportunity for HEI providers and investors.

Attractive Option for Homeowners: HEIs offer homeowners a compelling alternative to traditional home equity loans or cash-out refinances. By entering into an HEI agreement, homeowners can access their equity without taking on additional debt or monthly payments, making it an attractive option for those looking to unlock the value of their homes.

Investor Demand: As investors seek new opportunities for long-term growth and diversification, HEIs have emerged as an appealing option. The discounted entry points and potential for strong returns have caught the attention of both institutional and individual investors.

How Retail Investors Can Access The Home Equity Market

While the HEI market has been growing, access to this asset class has primarily been limited to institutional investors and high-net-worth individuals. However, platforms like Cityfunds are leveling the playing field by democratizing access to HEIs for retail investors.

With Cityfunds, investors can gain exposure to a diversified portfolio of home equity investments in top-performing cities across the United States with as little as $500. By leveraging fractional ownership and a user-friendly platform, Cityfunds makes it simple for anyone to invest in this emerging asset class.

Investors can choose from a range of city-specific funds, such as the Austin Cityfund, Miami Cityfund, and Los Angeles Cityfund, each offering exposure to a unique mix of properties and market dynamics. As the properties in these funds appreciate, investors can benefit from the growth in net asset value (NAV) and potential dividend distributions.

If you're interested in gaining exposure to the home equtiy market, you can visit the Cityfunds website to learn more about each of its available offerings. 

Should You Add Home Equity Investments to Your Portfolio?

As the Home Equity Investment market continues to gain momentum, it presents a compelling opportunity for investors seeking attractive returns, diversification and exposure to the booming home equity sector. With over $30 trillion in home equity waiting to be unlocked, the potential for growth in this asset class is immense.
As with any investment, it’s essential to conduct thorough research and consider one’s individual financial goals and risk tolerance before investing. However, for those looking to diversify their portfolios and capitalize on the quiet emergence of Home Equity Investments, Cityfunds offers a simple and compelling way to gain exposure to this exciting new asset class.

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