Florida Real Estate News –
Homeowners are richer than renters: Here’s why
NEW YORK – Feb. 2, 2018 – Why do homeowners accumulate more wealth than renters?
Homeowners must make a substantial downpayment when they buy a home, plus a mortgage payment every month, with part of every payment going toward paying the loan principal. That part going toward the principal is like having a mandatory savings account. In addition, they’ve purchased a financial asset that, on average, they’ll hold for a long period.
Neither action is necessarily the best way to accumulate wealth, but together they’re better than doing nothing. In theory, the money spent on a downpayment and principal, if invested in other ways, could create more wealth. However, most renters spend the money they save on other things.
As a result, it’s better to own a home for the average American, even with the recent changes to tax law that lessens the tax advantage of homeownership.
How does home-price appreciation compare with the return a renter would get from investing in stocks and bonds over time?
People believe that home-price appreciation in the U.S. is much higher than it really is. Over the long run, it exceeds inflation by about one-quarter to one-half percentage point per year. Increases in home prices and inflation must, by definition, be similar because housing is the biggest component in how the Federal Reserve calculates inflation.
But stocks historically have returned an annual average of five to six percentage points more than inflation. Of course, you can’t live in a stock, so it isn’t fair to compare price appreciation of homes with the return on stocks.
Homeowners also underestimate the cost of ownership. They overlook how much they pay for expenses, such as maintenance and closing and selling costs; and they don’t value their time and effort.
So what must renters do to accumulate as much wealth as homeowners? Renters could, on average, accumulate more wealth than homeowners if they saved and invested the equivalent of a downpayment, plus the savings difference between a monthly mortgage payment and rent, in a diversified portfolio of stocks and bonds.
But the reality is, they don’t.
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