April 14, 2017

Homeownership: Your savings lifeline

With home prices rising to all-time highs, many potential buyers imagine drowning in a sea of monthly payments for many, many years.

You’ve heard it before: naysayers and their tales of home-buying gone wrong.

“If the down payment doesn’t get you, well, the property taxes, maintenance and insurance surely will.”

— Naysayer

These so-called “savvy” investors say renters who dutifully put all money not spent on housing into stable investments—like mutual funds—may get a greater rate of return.

After a housing bust that put more than 10 million homeowners upside-down and 4 million more into foreclosure, criticism of homeownership as an instrument of wealth-building has understandably become louder in the last decade.

Though most underwater homeowners have swum back into positive equity, and many of those foreclosures are mortgage-eligible again, the math geeks still side with the naysayers. They’re quick to point out that the homes have only doubled in value since 2009, while the stock market has nearly tripled over the same time frame.

While that might be true in terms of raw math, it hides the fact that rent checks go nowhere, doing nothing. It’s giving money to someone else every month.

Conversely, a percentage of every monthly mortgage payment—after paying interest to the lender—goes toward home equity. Money that can be accessed in the future!

If a renter spends any “extra” money, rather than investing it, they won’t be building wealth through investment—they’ll be spending money (on some tangible asset, hopefully).

None of the naysayers seem to remember the stock market has had its little ups and downs. Meanwhile, homes have generally gained value steadily across many decades (about 1 percent above inflation).

Most financial analysts believe owning a home is the best path to financial stability. The real benefit is “forced savings.” While most people don’t have the individual fiscal responsibility to save every penny, they find it’s a bit more manageable to set smaller, near-term goals.

In a landmark study conducted in 2013, Harvard researchers came to much the same conclusion:

“While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. This seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”

In home-buying, that’s making monthly payments. Homeownership provides a lot of different opportunities—including earning profit from a sale or leveraging the equity for a home equity loan or refinance.

While a home is an investment in the future, renting can too easily become an investment in nobody’s future—except your landlord’s.