In the report, Ralph McLaughlin, Trulia’s Chief Economist, explains:
“Owning a home is one of the most common ways households build long-term wealth, as it acts like a forced savings account. Instead of paying your landlord, you can pay yourself in the long run through paying down a mortgage on a house.”
The report listed five reasons why owning a home makes financial sense:
- Mortgage payments can be fixed while rents go up.
- Equity in your home can be a financial resource later.
- You can build wealth without paying capital gains.
- A mortgage can act as a forced savings account.
- Overall, homeowners can enjoy greater wealth growth than renters.
Let’s expand more on #1 from this list: “mortgage payments can be fixed while rents go up.”
Don’t Get Caught in the Rental Trap
They say the only guarantees in life are death and taxes, but it seems like they should also add rent increases to that list.
A whopping $485.6 billion was spent on rents in the U.S. in 2017. This represents an increase of over $17.7 billion from the year before. As shown in the chart on the below, rents have increased consistently over the last 20+ years.
There are many benefits to homeownership. One of the top ones is being able to protect yourself from rising rents by locking in your housing cost for the life of your mortgage.
In an article by The Mortgage Reports, they report that “buying and owning a home is the essence of ‘The American Dream.’ Each month, your housing payments go toward owning your home instead of renting it; building your personal wealth and assets instead of someone else’s.
History has shown that homeownership is a clear path to wealth-building, with homeowners boasting a net worth [that is] multiples higher than the net worth of renters.”
That brings us to #5 from the list: “homeowners can enjoy greater wealth growth than renters.”
A Homeowner’s Net Worth is 45x Greater than a Renter
Every three years, the Federal Reserve conducts a Survey of Consumer Finances in which they collect data across all economic and social groups. The latest survey, which includes data from 2013-2016, reports that a homeowner’s net worth is 44.5 times greater than that of a renter ($231,400 vs. $5,200).
The graph below demonstrates the results of the last three Federal Reserve studies.
Put Your Housing Cost to Work for You
Homeownership is a form of ‘forced savings.’ Every time you pay your mortgage, you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.
The latest National Housing Pulse Survey from NAR reveals that 85% of consumers believe that purchasing a home is a good financial decision. Yun comments:
“Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math should not be overlooked.”