Homeownership & Wealth: The Dynamic Duo

by Alain Pinel

General Manager of Intero Prestigio international

Is homeownership getting out of fashion? Scary thought! Ridiculous actually! Why such a daring and provocative question then? Well, if you believe in stats, you have to be concerned that the rate of homeownership has been dipping of late.

In 2004, the rate reached its peak at 70%. Today, it stands at 64.3%; it’s as low as it has been for the last 20 years. The reason? I bet you already figured out what it is, at least part of it….. Smack in the middle of the 2004 to 2015 stretch, we have been shaken up by the many tremors of a 4 year long financial crisis, the Great Recession to call it by its name.

The New York Times, in its SundayReview, wrote an editorial on the subject matter, partially using the findings of a research by the Joint Center for Housing Studies at Harvard University.  One sentence gives the full flavor of the article: “Since the housing bust, renting has been in and owning a home has been out.”

The declining ownership rate, mentioned above, proves the point. During the period of time when the rate shrunk to the extent of 8%, the number of homes occupied by tenants increased by about 25%.

Some observers may wonder whether this situation can be explained by the economic slowdown, with what it means in terms of jobs & incomes compression, or if it represents more of a trend, a lifestyle change of sort. Is homeownership losing its appeal?

The article is reassuring. Homeownership is as American as apple pie. It has been and still is, as much as ever, central to our ability to amass wealth. Between buying and renting, there is no competition. Even with the substantial decline in wealth due to the housing bust, says the NYT, the net worth of homeowners over time has significantly outpaced that of renters, a group which tends to accumulate little if any wealth.

When analyzing the reasons for the above, the Joint Center for Housing Studies makes the key point that homeownership requires buyers to save money for the down payment, and requires them to keep on saving to pay down the loan balance together with interest.

The alternative, renting a home, not only does not build equity, but does not require the tenants to save any money at all. They can if they are able & willing, but, at the end of the day, most don’t, because they don’t have to.

Of course we cannot downplay the risks involved in purchasing real estate. Prices can go up (as they have in a big way during the last three years or so), but they can also go down, shrinking equity or wiping it off altogether. Does not happen often and does not last long, but it sure hurts when it happens, as it did during the housing bust.

Frankly, I don’t know many people who wish they had rented a home rather than buy one. When in doubt, think about what you paid for the house you live in and what you could sell it for today. You can do the same exercise with all previous homes you bought and sold over the years. Great education to make believers out of the skeptics among us.

Bottom line: unless you are looking to stay in any given place a very short time (between two homes so to speak), there is no good reason to rent rather than buy, create wealth in so doing, and live the American dream.

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