The four-year bull market in stocks is riding high because of the AI boom. But it's also increasing the cost of money.

U.S. household wealth is becoming more heavily concentrated in stocks than real estate. That could be dangerous.

Owning a home used to be considered a clear path to building generational wealth in America.

That path no longer looks as clear-cut, given the entrenched U.S. housing-affordability crisis, mortgage rates climbing above 7% in September and the S&P 500 index SPX set for a fourth year in a row of double-digit gains.

As stocks ride high and the bull market turns four years old, equities not only have eclipsed housing as the most valuable U.S. household asset, but the gap between the two has kept growing.

"This is AI versus housing," said Mark Zandi, chief economist at Moody's Analytics. "They are bookends of the economy and AI is leading the way, but housing is struggling to keep up."

Stocks now account for more than a 30% share of total U.S. household assets, versus real estate at closer to 25%, according to the below chart from TD Securities.

More household wealth is now concentrated in stocks than the housing market.

That wasn't always the case. Back in the mid-2000s, real estate was a much larger share of total household wealth at more than 30%, while stocks were around 15%.

After the 2008 financial crisis, a dearth of new home construction made affordability a significant challenge for many people trying to break into homeownership. Then came the 2020 pandemic, skyrocketing home prices, 2.65% mortgage rates and some of the highest inflation in 40 years.

Yet as the Federal Reserve began raising interest rates in 2022 to fight inflation, tech stocks started charging higher following OpenAI's release of ChatGPT in November 2022, as the below chart shows. Mortgage rates and borrowing costs across the economy increased, but a fear of missing out in a powerful subset of stocks SOX MAGS also was ignited.

Zandi called the artificial-intelligence industry and the housing market "mirror images of each other." Higher rates have been "locking in homeowners and crushing demand" in the housing market, while a small group of megacap tech companies borrowing in droves to fund capital expenditures for the AI build-out have been "largely impervious" to higher rates, "at least so far," he noted.

When you think of who is winning, that's the well-to-do and wealthy, or people with most of their assets in stocks, Zandi said. The middle class may be benefiting from their 401(k) equity exposure, but borrowing costs are hurting and their homes - often by far their biggest asset - aren't going anywhere fast, he added.

After bypassing 5% in September, some on Wall Street see a 6% yield as possible on the all-important 10-year Treasury note BX:TMUBMUSD10Y note, which serves as the starting point for pricing new 30-year mortgages, as well as other types of household and corporate debt.

Still, no single asset class leads forever, Zandi said, which is why diversification is recommended.

"The stock market is increasingly the economy," said Heather Long, chief economist at Navy Federal Credit Union.

That's why any major pullback or bear market in stocks "will rock the economy," she said, pointing to the 2001 recession that followed the bursting of the dot-com bubble.

Meanwhile, growing wealth tied to the stock market partly reflects "billionaires getting richer and richer," as well as aging baby boomers and their accumulation of assets, Long said.

That trend can be seen in recent demand for more expensive $1 million homes, while the rest of the housing market has wobbled. Qualifying for a home loan also has gotten harder because home prices have outpaced income growth, as the below chart from an Oct. 6 TD Cowen housing report shows.

That backdrop has led some younger adults to chase audacious bets in the market, while others have adopted a "carpe diem" lifestyle where their earnings help support travel and experiences instead of savings.

Still, there's a third trend emerging - one where younger adults have been able to buy homes by their mid-20s, according to Long, based on Navy Federal Credit Union data.

"It's overwhelmingly a blue-collar victory," she said, pointing to clients in the miliary or trades with stable incomes and careers who typically live outside of high-cost-of-living areas. They also frequently have made use of home-buying programs featuring low or no down payments.

"It's still rare - less than 10% of our portfolios," Long said. "But it reflects a certain degree of financial stability early in their lives."

-Joy Wiltermuth