Back HomeHomeowner Wealth Vs Renter Wealth
December 23rd, 2016 by keithandkinsey
In the current political climate, there is a great deal of talk about wealth inequality in America. While I fully agree there are some struggling people that need help (and should be helped), I also think that our country is one of great opportunity where an ambitious person can choose to create wealth. In a country that allows for freedom and personal choice, wouldn’t you choose to be on the high end of the wealth inequality if you could? There are many ways to build wealth; simply working hard and spending less then you make, investing, starting a business, etc. However, one of the biggest keys to wealth is owning real estate.
There are numerous reports and analytics that talk about how much more wealth the average homeowner has compared to the average renter. The numbers I’ve seen are that the average home owner’s net worth is 30-46 times more than the average renter’s net worth. That is a huge difference in the wealth of homeowners. Some might argue that homeowners typically make more money so that is why they have a higher net worth. While, that may be part of the factor, the truth is a huge percentage of American families spend all the money they bring in whether they make $30,000 per year or $200,000 per year. Most people are only a paycheck or two away from falling behind on their bills.
Then why is the homeowner net worth so much higher? The truth is, it’s because a home is a good savings account. It’s something that forces people to save money. For example, the median home in Dane County is worth $239,000. If someone bought that house with 10% down and 3.8% interest, $321.12 of your first payment goes to principal. The principal portion of your mortgage payment increases every month while the interest portion of your payment decreases every month, because your payments are based on the outstanding balance. Every one of these principal payments turns into equity. In the above example, after 10 years in your house you would have $71,159 in equity (down payment + principal payments) assuming the value of the house never changed.
In reality your house value will change. Historically, real estate in the Madison area has appreciated an average of about 4% per year (much better than your 0.25% from your savings account). If this trend continues, your $239,000 house 10 years later would be worth $353,778. So, now your equity from principal paid plus appreciation would equal $185,937!
Lastly, a home is also a hedge against inflation. In other words, your rent would continue to go up due to inflation, but your house payment stays the same (other than property taxes). So, home ownership allows you to lock in your housing costs. Your house payment would seem smaller and smaller as time goes on, your income goes up, and the value of a dollar decreases. Think about this- my parents bought their house around 1970 for close to $30,000, and their payment would have been less than $200/month (seems tiny in today’s dollars) That house is now worth around $200,000. If they had rented all that time, they’d have no equity in a home, and they would be paying about $1600/month in rent today.
The combination of all of these things are why a homeowner’s wealth is far superior to the wealth of a renter. Now of course, there is a time and place to be a renter. I don’t advise buying a home until you are financially stable and out of debt. Also, if you are new to an area it’s a good idea to rent awhile until you learn the area enough to know you are going to stay and where you want to live. Typically you should plan on being in a house for at least 3 years if you are going to buy. However, I don’t know why someone would just settle on renting long term. Home ownership should be everybody’s long term plan as it’s the best financial choice.
