Wealth = What we own minus what we owe
Homeownership is a critical piece to the American Dream; however, according to a recent New York Times Editorial, more Americans are choosing to rent instead of buy. While this might make sense after the housing crisis in recent years, homeownership can actually lead to increased wealth. The New York Times Editorial uses research conducted by Harvard University to paint a compelling picture as to why homeownership is a vital cornerstone to building wealth.
So why is homeownership so important for building wealth? Here’s what some researchers have found and what it means for you.
Homeowners have an average net worth that is 36 times greater than renters.
Homeowners, on average, have a net worth 36 times greater than renters. This big difference between homeowners ($194,500) and renters ($5,400) is because of the forced savings created by having a mortgage payment. Each time a homeowner makes a payment, they are putting equity into their home adding to their overall wealth. It’s like having a savings plan you didn’t even know you had! *Figures above are based on 2013 values. 6
Homes deliver real appreciation over time.
We’ve lived through a decade of massive swings in real estate values, from the peak in 2007 to the bottom in 2011. The Harvard study highlighted that if a homeowner experienced the average gain by a common home price index, a typical home would be worth 26% more in current dollars in 30 years and those increasing values compounded over a longer period of time can produce substantial increase in real home values.1
Buying with a mortgage increases the return on investment.
If a buyer puts down 5% and experiences 4% annual appreciation, after five years the house value would increase by almost 22% – or more than four times what the owner originally put down.1
Homeowners enjoy multiple tax benefits.
Some homeowners may be able to enjoy the benefits of mortgage-interest and property tax deductions. Please consult a tax professional for more information and to determine your eligibility for this benefit.4
Homes protect owners from rising rents.
Most mortgages are fixed and the monthly payment* tends to remain the same, yet because of inflation the real payment cost actually declines. That means that over time homeowners pay an increasingly smaller share of income on housing. When a mortgage is paid off the home is owned free and clear. The alternative does not have such a pleasant long-term outcome. Rent generally keeps pace with inflation and it is never “paid off”. 2 *Taxes and insurance are subject to change.
The burst of the housing bubble had a severe impact on all aspects of household balance sheets.
Plummeting house prices contributed to the decline in household wealth; however, despite the decline in home values, housing continued to account for over 60% of the median homeowner’s total assets as the financial crisis adversely affected prices of other assets such as stocks and bonds as well. As housing values continue to increase, the equity in those homes appreciates as well.5
Homeownership as a Steppingstone to Wealth
To summarize, the NYT Editorial reports, “As a means to building wealth, there is no practical substitute for homeownership.” With interest rates at historic lows, it is the ideal time to consider the benefits of homeownership and building equity in your most valuable asset. To learn more about the advantages of purchasing a home, please contact me for a free, no-obligation mortgage evaluation and let’s talk about your options. Sources:
This information was obtained by a third party and is intended for informational and educational purposes. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness as a result, there is no guarantee it is not without errors. 068i0000001LdLz