Study Says Home Ownership Doesn’t Build Wealth
Owning a home may help you save money, but it won’t help you make money.
Households are better off taking control of their finances than relying on fluctuating home values. That is the finding of a new study conducted by Florida Atlantic University, Florida International University and the University of Wyoming.
“On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated with gains in the traditional financial asset classes of stocks and bonds,” wrote study co-author Ken Johnson of FAU’s College of Business, in a release.
The question of rent versus buy has been wildly popular during the housing recovery. The historic housing crash at the end of the last decade came as a bitter shock to millions of Americans, many of whom never considered that home values could fall at all or that they could fall as far as they did.
The U.S. homeownership rate is still hovering near its record low, yet buyer demand has been steadily rising. Construction, however, has not been rising quickly enough to meet that demand, resulting in fast-rising prices. In the last few years, prices have increased faster than income and inflation.
In some markets, home values have hit record highs, again fueling the debate over which is more lucrative, buying or renting?
Rents have also increased dramatically, as new households are formed and millennials, now the largest generation, struggle to afford a downpayment. While there has been a building boom in luxury rental housing, that has not been the case with affordable rental development.
Still, researchers in the study claim the old adage of “throwing your money away on rent,” doesn’t hold up. That is because it assumes that the extra money a renter saves by not owning a home and not saving for a downpayment is simply spent on goods or services and not invested.
“When you assume that those monies are reinvested at a rate of return, renting, on average, wins in terms of wealth creation,” Johnson said. “Of course, many renters will not reinvest those monies and will instead use them for consumer goods, which is the least desirable option in terms of building wealth.”
In other words, the rent argument only works if the renter invests the rental savings rather than consuming it.
Johnson and his colleagues also assessed price volatility. Some local housing markets, like Miami and New York City, are far more volatile than Kansas City or even Atlanta. The researchers therefore went city by city, measuring home price appreciation against a portfolio of stocks and bonds that were equal in volatility.
“To have a fair race, that reinvestment into stocks and bonds has to be as risky as that particular housing market,” Johnson said.
While all housing has always been local, home price performance has been especially so following the recession. In the nation’s 24 largest metropolitan housing markets, just four showed median home price appreciation between 2010 and 2016 that was higher than the median return of a stock portfolio, according to a report by Redfin, done in November 2016.
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