A recent New York Times editorial noted that the housing market’s recovery in sales and prices has restored confidence for consumers that homeownership is a wise investment. “Homeownership and Wealth Creation” states that “the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little if any wealth.” Experts note that owning a home is the basis of our ability to grow our net worth.
The Federal Reserve’s Survey of Consumer Finances found that “the average net worth of a homeowner ($194,500) is 36 times greater than that of a renter ($5,400).” The primary reason for the significant difference is the concept of “forced savings” which results from having a mortgage payment. The Times article explains that home buying necessitates saving for a down payment and having a mortgage requires that the homeowner allocate money each month for the mortgage principal and interest. The near-term goal of a down payment and long-term goal of paying the mortgage outweigh the possible goals of renters in most cases. Even when renters have excess cash, they often find it “difficult to systematically invest each month in stocks, bonds or other assets.”
If you are considering searching for a home, keep in mind that the most practical way to build your personal wealth is through homeownership.