Despite misconceptions surrounding Millennials, the dream of homeownership is still strong amongst Americans. And it’s one that we’ve seen remain consistent throughout the years, mostly due to the fact that homeownership has been shown to significantly impact ones personal wealth.
But just how much of a leg up is owning over renting? We decided to find out. We’ve taken months of research and boiled it down to the most impactful statistics to illustrate (literally) just how much homeownership impacts personal wealth in the U.S.
- https://www.reuters.com/article/us-usa-property-poll/u-s-house-prices-to-rise-at-twice-the-speed-of-inflation-and-pay-reuters-poll-idUSKCN1J20G3 and https://www.businessinsider.com/us-home-prices-outpacing-inflation-2016-4
The simple act of paying a mortgage over time can cause a homeowner’s worth to be 44x that of the average renter. With staggering numbers like those, it’s no wonder that it has remained a favored means of building wealth. It’s held the number one spot for decades, beating out stocks, mutual funds, bonds, savings accounts, CDs and gold. Although many of these categories have experienced shifts in their preferred order, especially during economic changes or downturns, the majority of American’s favor homeownership as the best long-term wealth-building vehicle. And not surprisingly, the past few years align with the return and strength of the real estate market. Confidence has grown as homeowners have seen property values rise.
The continued growth in property values has created challenges in the market, with homes appreciating 2x faster than inflation. The demand is outpacing supply and for many families, income is not keeping up. Although this isn’t a new phenomenon, it is a growing concern and one that is stifling new homebuyers. During the height of the housing bubble in 2006, the average homeowner was spending more than half of their income on mortgage payments each month. More recent numbers indicate mortgages are taking about one-third of average income, still a significant portion of a paycheck to lose off the top. Prospective homebuyers in highly sought-after markets aren’t faring as well, with areas like New York City or San Francisco requiring more than ninety-five percent of one’s income to cover the mortgage, on average.
Where do we go from here?
So, what’s the balance between the value of homeownership and the increasing costs, or in some cases, risk? According to research, the value remains, even for minority or low-income families. The simple reason is that homeownership creates a “built-in” savings mechanism. Each time a mortgage payment is made, equity in a tangible asset increases. The process can dramatically increase a family’s total financial picture. Of course, these benefits take time to accrue. The early loss of a home or foreclosure reality negates the long-term investment value. Which means, choosing the right home related to the existing income matters. And taking the time to save up for a down-payment or create an emergency back-up fund is a critical first step for a new homebuyer.
It’s also important to understand the tax incentives afforded to homeowners, in particular, the mortgage interest deduction. The average mortgage interest deduction provides a value of $2,000 for homeowners on an annual basis, meaning taking advantage of this incentive is another way to increase wealth when used strategically.
Other benefits of homeownership
Beyond the wealth-building opportunities, homeownership has been found to provide many other benefits.
Overall life satisfaction
You can’t really put a price on increased life satisfaction, but you can evaluate it with statistics. An overwhelming 93% of homeowners said yes when asked if owning a home made them happier than renting. And 83% said they couldn’t go back to renting after owning their home. Why? Because in many cases, the act of owning a home creates the opportunity to live a life that’s different from a renter. 76% of homeowners engaged in new hobbies after purchasing their homes, such as gardening, grilling or interior design. These activities are often restricted as a tenant.
Owning a home also changed the relationships for almost 70% of those asked, with family and friends. A sense of pride was cited, as well as the opportunity to entertain or bring the family together. These simple but important activities increase fulfillment for many homeowners.
Higher Educational Achievement
This outcome of homeownership may come as a surprise. And yet, according to many studies, children perform better at school when they live in a home that is theirs. It seems the biggest factor may be stability. Homeowners move less frequently than renters and, as a result, typically become more embedded in their communities. Changing schools repeatedly has been shown to impact students and their educational outcomes. negatively. As a result, not only are families naturally more entrenched in a community where they own their home, the student can maintain educational stability and improve their chance of graduating.
Community and Neighborhood Stability
When families stay in one place, the community and neighborhoods benefit. The ability to strengthen social ties and develop relationships with neighbors requires that people stay put for more than the average rental term. Understandably, many renters move frequently, whether driven by personal circumstances or landlord demands. In fact, research tells us that renters are 5x more likely to move than homeowners. Without longstanding invested community members, which come through owning property in a given area, the neighborhood can suffer.
One important assessment of a healthy community is its crime rate. Homeownership impacts crime in a similar way that it does educational achievement and overall neighborhood stability. When homeowners interact with neighbors and become invested in one place, it can have a positive effect on the area and create shared expectations for action. What that means is that when neighbors are close or band together for a common cause, crime can be less prevalent than in areas where frequent turnover or a lack of shared purpose exists.
No, homeownership likely can’t prevent you from getting a common cold. But it may have a substantial impact on mental health. Depression and psychological distress are areas of research that seem to indicate a healthy, cohesive place to live can play a positive role. That home and neighborhood can also factor into risky youth behaviors such as teen pregnancies or other high-risk activities, with a more stable, cohesive neighborhood lowering the risk for many children.
Because a home leads to wealth creation for many homeowners, it changes their total financial picture. Whether they use that to secure additional education, for themselves or their children, or just save the money that comes from a stabilized living cost, the outcomes are significant. Even low-income homeowners perform significantly higher than low-income renters, which can change the generational opportunities for wealth building. One study found that increasing home values for an owner could improve their children’s earnings later in life, whereas an increase in renter’s costs had the opposite effect.
The U.S. government encourages homeownership
With all the benefits covered above, it’s no surprise that the United States government encourages homeownership. From tax incentives to housing policies, Americans not only have the opportunity to buy a home but also to quickly benefit from it. Below are a few ways to take advantage of a home purchase.
Not only are mortgage interest deductions available to homeowners, closing costs and property taxes are as well. With the home mortgage interest deduction, the interest that has been paid in the previous year is deductible on up to $750,000 worth of principal. Annual property taxes are another place to take advantage of favorable tax treatment. And new homeowners will want to keep track of their closing costs, as they are deductible too.
With the creation of Fannie Mae and Freddie Mac, the government made buying a home possible for many and for the first time. Not only did their government-backed mortgages allow for thirty-year loans in most cases, but they also secured the risk. This means that more banks are able to offer more loans and give the opportunity to more people knowing that they’re protected from the potential of defaulting lendees.
Down payment assistance programs (DPAs) help new homeowners by reducing the amount of money they need to save for a down-payment. Since this consideration is a barrier for many people considering buying a home, the elimination of a 20% down payment requirement can be a gamechanger. Whether these are unique loan structures or grants that don’t require the receiver to pay the amount back, many are government incentivized or funded.
The Federal Housing Administration (FHA) encourages homeownership by making loans more readily available to low and moderate-income families. With the goal of reaching more prospective buyers and offering them alternatives to loans that may have high-interest rates and closing costs, the FHA makes it possible for people of all economic status to attain their goal of homeownership.
The Department of Veterans Affairs (VA) loans were designed to help active or retired military personnel transition into civilian life, one that includes homeownership. The most popular benefits of these loans are the zero-down requirement and the private mortgage insurance (PMI) waiver.
Barriers to homeownership
With all the positives to homeownership, challenges still remain. For many, these problems are the barrier to entry.
The most obvious challenge is financial resources. In most cases, it still requires wealth to begin the homeowner process. This is most evident in the down payment. Many starting their journey to homebuying are faced with the challenge of saving enough money for a down payment. Of those polled in a recent survey, 61.7% of respondents said that they can’t afford a down payment and 48% report that they have nothing saved.
Another challenge is the student loan debt that many millennials took on during their pursuit of education. Only 12% of millennials carrying student debt report they would also be able to save a down payment. This means for them, the dream of homeownership may not start until after they have paid down their existing loans.
The Path to Homeownership
As many begin to consider or continue the process of working towards homeownership, there are two things that can help take it from a dream to reality.
It’s never too early to get educated about the home buying and homeownership process. From learning the terms (PMI, FHA and fixed vs. adjustable loans, just to name a few) to taking advantage of the available resources, you can’t go wrong with more education. Look for the best options that fit your needs and consider all down payment and first-time homebuyer resources.
Pay down as much debt as possible. Debt-to-income ratio is a big factor when it comes to buying a home.
A good credit score will increase your chances of pre-approval and get you a better mortgage rate.
Preparing to buy a house means budgeting for all of the associated costs. Beyond the down payment or monthly mortgage commitment, be sure to understand fluctuating costs (like property taxes and insurance) and unexpected costs that can come with homeownership. It’s also important to be realistic with your timeline. Once you understand the programs you may be eligible for, and the amount you’d like to spend on your new home, take the time to understand how long you need to save accordingly. With the right education and savings plan, homeownership can be a rewarding path.