Is Home Ownership Necessary to Build Wealth? - Frederick Real Estate Online (2024)

Home Ownership in America

For decades it has been an established financial principle that homeownership is key to wealth building. A recent study by NeighborWorks America found that over 60% of Americans consider it a very important part of the “American Dream”.
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Homeownership still proves to be a major factor in wealth building for average Americans. Home equity remains the biggest financial asset for the typical American homeowner, who has 52 percent of their wealth tied up there. Owning a home is the main way most people increase their net worth over time.

If you’ve been on the fence because of concern about the economy, or because of uncertainty about the future, it may be a good time to reevaluate whether homeownership is the right choice for you.

According to the Consumer Housing Trends Report, the Zillow Group reports on consumer behavior regarding homeownership, home renovations, and renting. Here are some key points from the most recent study of housing:

🏡A Home of My Own – The Key to Building Net Worth

Owning a “place of one’s own” has long been integral to the American Dream. Among every demographic today, homeownership is a desirable path for the majority of people. When most of us investigate the potential of buying a home, we have intrinsic, emotional reasons, and we have analytically calculated reasons. After all, we use both sides of our brains to make decisions about where we will live and how we will invest in our future.

• More than half (64 percent) of homeowners view their home as a financial investment, while 36 percent say they see their home more as a reflection of their identity.

💲Is homeownership a good investment?

The Case-Shiller Report of Home Affordability shows that in 2021 it was cheaper to buy than to rent in about half of the metropolitan areas in the country. An important point to consider in these equations:

Most studies of this nature use a 20% down-payment figure as a baseline. There are many loan programs that don’t require nearly that much. Consider:

• FHA backed loans require 3.5% down
• VA loans do not require a down-payment
• Many conventional loan products require 3%, 5%, and 10% down
• There are many state and local loan programs that offer down-payment assistance in the form of grants and loans. Many of these loans are forgiven or paid off after a period of time, often 5 years.

Every three years, theFederal Reserveconducts theirSurvey of Consumer Finances in which they collect data across all economic and social groups. Their recent survey data covers responses from 2017-2021. As reported in the Wall Street Journal a typical homeowner’s net worth was $300,000, while that of renters was $8000 in 2021). Given that home prices have risen by nearly 20% since then, according to the Federal Housing Finance Agency the wealth of home-owning Americans would have grown even more. That is,

• In 2019, the median net worth of homeowners was $255,000, compared to $6,300 for renters.
• The difference in median net worth (the difference between gross assets and liabilities) between a homeowner and a renter is 40.5 times as much.

Affordability – The Elephant in the Room

Until very recently historically low interest rates have maintained the affordability of real estate. With rising mortgage rates combined with recent accelerated home prices (due to supply and demand) affordability is now the elephant in the room.

No one is questioning the fact that home ownership has become more difficult for first time buyers in many locations in the country. Karen and I have been in real estate for over 30 years and we have seen interest rates rise and fall. Rates are cyclical.

As expected, we are seeing lenders come out with programs for down-payment assistance, rate buy-downs and adjusted-rate mortgages, as well as other helpful incentives.

Our current mantra for would-be homeowners: Marry the House, Date the Rate.

If you can afford home ownership, and if you can find a loan program that works for you, buy the home. Get into home ownership. Start building equity and wealth. You can refinance in the future, when the rates come down. They will…they always do.

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What Americans Feel About Home Ownership

The Zillow housing study reveals the top five reasons why homeownership is a value to Americans.

• Home is a place to raise children and provide a good education.
• Home is a place of safety.
• Owning a home provides more space for your family.
• Owning a home provides control over your own living space.
• Homeownership is a good way to build wealth to pass on to your family.

Home buying motivations for most Americans include having control and freedom to create the home they want. To paint the walls and choose the flooring, and to decorate to their heart’s content. Parents want a yard for their children (including the fur children). They want to choose a home in a desirable school district. In short, they want more control over the lifestyle they want to live. Homeownership facilitates all of the above.

Wealth-building is a value that crosses from right-brain to left-brain very easily. Having wealth to pass on to family makes sense to both the rational mind and the heart. The number one way to build wealth for most Americans has been and continues to be homeownership. Homeownership is key to wealth building and will continue to be so in the future.

What Americans Think About Buying A Home

Home appreciation is happening in all areas of the country, at a pace that is normal and healthy, and also at a pace that is double that of wage growth in most of the U.S. As economic conditions have improved, unemployment is historically low. More Americans have job stability and savings to seriously consider homeownership.

When people evaluate homeownership statistics, which have been gathered over generations now, they draw the same conclusions. For most of us, our wealth increases over time because of homeownership.

• Home values have increased by 18% to 20% over 2021
• And will continue to rise (healthy pace: 3% to 5%) over 2022-23, because of the low supply
• Interest rates are rising, but still lower than the 40-year average
• Rents are on the rise again

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❓Is Buying Better Than Renting?

You have to live somewhere, right? You will either pay yourself, or you’ll pay your landlord. When you pay yourself year after year for 30 years, you build equity. Not only that, your home appreciates over 30 years simply because of the economic forces of inflation.

Homeownership is still considered one of the most reliable ways to build wealth. When you make monthly mortgage payments, you’re building equity in your home. . .When you rent, you aren’t investing in your financial future the same way you are when you’re paying off a mortgage.

Here’s my Disclaimer – Buying a home only makes sense if you plan to stay put for 5 years or so, and if you are really financially capable. No judgment if you are not. One of the worst things we saw during the build-up to the housing collapse of ’08 was the fact that people were given mortgages when they really couldn’t afford them.

If all the factors are present for you to buy vs. rent, it only makes financial sense. Factors include:

• Stable employment
• You plan to stay for a minimum of 5 years
• A reputable lender views you as creditworthy
• You have enough for a down payment
• …other qualifying factors may apply, depending on your financing

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Here’s my favorite example of some very smart people who understood homeownership:

Homeownership is Key to Wealth Building

Case Study in Wise Homeownership: Karen’s Parents

“When my dad retired from the Navy, my parents bought a 2.5 acre parcel in a small town in Florida. They built a house, then subdivided the lot, then built another house. They sold the first house. Then they sold the 2nd house, bought a fixer-upper (for cash), moved into it, and fixed it up. Two years later, they sold that house for double what they paid for it. (it was 2006, the top of the market…what excellent timing!) They bought a home that they now live in, and all along the way invested extra money in stocks. (the stocks haven’t done as well…the real estate did!)All of this took place over 40 years, of course, but that’s what real estate is…a long-term wealth-building asset. Dad was fond of saying: ‘It’s a home, not an ATM, to be refinanced at every opportunity.'”

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💰Is homeownership necessary to build wealth?

Of course, there are always exceptions to the common wisdom that homeownership is necessary to build a net worth. There are people who are skilled at making lots of money. There are those who are masters of the stock market. People build wealth by building businesses, by bringing a fantastic product to the market, and by creating technology that changes people’s lives.

But let’s be realistic…not all of us are super talented and super smart, able to achieve the above-mentioned super feats.

No, homeownership is not always necessary to build a net worth. But for most of us, it is the way to build wealth over time. For generations Americans have faithfully paid their mortgage over a lifetime, to end up with a nest egg that equals financial gain they could have not achieved any other way.

Helpful Resources Regarding the Benefits of Homeownership:

• We want to present a balanced perspective on our blog page. In his clever article Five Types of People Who Shouldn’t Buy a Home, Conor McEvily, Seattle real estate agent, points out that at certain times, buying a home and taking on all the commitments associated with homeownership are best deferred to when you are really ready to make the leap.
• With rents around the country skyrocketing the tax benefits of owning a home only become more attractive. Check out Bill Gassett, Greater Metrowest Massachusetts Realtor’s article – Tax Advantages of Owning A Home
• Lynn Pineda, South Florida Realtor, has written a very helpful article for first time home buyers: What you Wish You Had Known about Buying a Home. Wouldn’t it be great to know the mistakes you need to avoid before you begin the home buying journey?

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If you’re ready to make the step to homeownership we can help you through the process.

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