The home as a piggy bank
Sure, it’s not a piggy bank you can raid on a regular basis when you’re low on cash, but the single-family home can reliably stockpile the bacon, thanks to equity accumulation.
Those monthly mortgage payments, when they’re not paying the interest on the homeowner’s loan, help build equity over time, which can be a substantial financial asset along with the tax benefits of deductible mortgage interest and property taxes.
Let’s rewind a few more additional years before the start of the pandemic, where First American found that homeowners who purchased property in 2014 have made out especially well.
Their calculations — based, in part, on data from Freddie Mac and the U.S. Census Bureau — show a wealth-generating benefit of nearly a quarter million dollars ($225,000 to be more exact).
Renters, by contrast, cumulatively lost $148,000: an amount that could have covered about 50% of the median list value in Rockford, Illinois — the nation’s sixth-hottest housing market, according to Realtor.com.
Even homeowners who bought at the height of the 2006 housing boom have seen a gain of $169,000, while renters lost out on $229,000, First American reported. But before you suggest renters are just “throwing money away”, ask some of them why owning a home isn’t always the greatest idea for wealth-building.
For starters, renting offers greater flexibility to move for job opportunities, personal reasons, or lifestyle changes without the burden of selling a property.
You can also avoid the hefty down payment and closing costs associated with buying a home.
Security deposits are usually cheaper, and landlords typically handle most (if not all) repairs and maintenance, saving renters time, effort, and money.
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Read MoreHomeownership: pros and cons
Owning property stores wealth that comes at a price — or prices, if you’d prefer. From basic upkeep to possible major repairs, alarm systems to alarming taxes, the expenses may or may not outrun equity over time. So, is the pain worth the gain?
Pro: No monthly payment manipulation: Landlords made much of supply issues as a reason for jacking up rent rates in the last few years — making the unaffordability of apartments hit an all-time high.
However, that’s not quite accurate. ProPublica revealed that Texas-based RealPage’s YieldStar software uses a mysterious algorithm that helps landlords push for the highest possible rent rates on their tenants.
Con: Taxes and insurance: If rents have soared, then property taxes in desirable areas have hit unprecedented levels.
In Cook County, which includes Chicago, some homeowners saw rates skyrocket by as much as 1,000% in 2023. The irony is that, for many who live there, higher property values played a pivotal role in the increase.
Meanwhile, nationwide home insurance rates were projected to rise 6% throughout 2024 after 20% hikes in the last two years, according to an Insurify report.
Pro: Tangible asset: Rent payments go directly to the landlord and offer zero tax benefit.
When you factor in that real estate typically appreciates over time, potentially increasing a homeowner’s wealth, it’s easy to see where renters might be experiencing remorse.
Homeownership rewards you with a tangible asset you can pass down to family, place in a trust, or rent out should you move or have a spare room.
Con: Illiquid, inconstant wealth: Home wealth isn’t nearly as easy to tap as withdrawing from a bank account or stock portfolio — it only becomes fully available when you sell your property.
What’s more, it can get highly unstable if real estate markets fluctuate in your area.
One toss up, one sad truth
Accumulated equity can work in your favor if you sell and then move to a locale where prices are less expensive.
In Louisville, Kentucky, rents average $1,137 and the median home price is just above $227,414.
In this scenario you could also go from owner to renter at a significant monthly savings. Buying in Louisville with 10% down at the current interest rate (6.79% for a 30-year fixed mortgage, as of Nov. 7, 2024) will result in a monthly payment of $1,321, and that’s before taxes and escrow.
If you want to stay in the market where you just cashed out, you’ll now face the same impediments as other buyers saddled with higher mortgage rates than at any time between June 2002 and October 2022, according to the Federal Reserve Bank of St. Louis.
Yet, for all the numbers, good or ill, one salient and sad fact remains: plenty of renters saddled with inflated leases and costlier expenses will find themselves moving backward, not forward, in pursuit of their “American dream.”
Whether a new president can change that, given their previous track record of tax cuts and policies that are greatly skewed toward the wealthy, may prove an even longer shot at best.
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