Homeownership and Wealth Building
Owning real estate, home ownership in particular, is widely considered to be one of America’s best tools for building wealth.
Home ownership is part of the proverbial American dream and the process of buying and selling homes has been dramatized now into countless hit TV shows that package someone’s life dreams into 22 minutes plus commercials.
In the red hot real estate market of summer 2020 through summer 2022, real estate operated as an almost “can’t lose” environment with Denver metro home prices skyrocketing at unprecedented rates of 20% appreciation per year.
Consequently, real estate ownership started being viewed by many as a get-rich-quick scheme and a broader, more nuanced historical perspective was placed to the wayside.
So, as we find ourselves in our current real estate market of spring 2023 where prices are largely stable and the pace of the market has normalized, the question that begs asking is, “Is homeownership still a smart path to wealth building?”
“Is homeownership still a smart path to wealth building?”
There are two primary perspectives when viewing homeownership and wealth building.
The first perspective is regarding the affordability of housing as it relates to inflation over time. Going back to the year 2000, the U.S. Bureau of Labor Statistics reports the growing price of housing (either owning or renting) is fairly middle-of-the-road compared to the cost of other life essentials.
Hospital services and college expenses have increased the most, whereas tech products like TVs, computer software, and cell phone plans have continued to become increasingly affordable by comparison. Seriously though, remember when having a TV larger than 32 inches wide was a neighborhood attraction?
The key takeaway here is that home ownership has proven to to be a hedge against inflation because buying a home at a fixed price with a fixed interest rate leading to a fixed monthly payment has actually made homeownership increasingly cheaper over time for people who bought in 2000 (or any year since, for that matter).
Spending $1,000/mo for your home in 2000 might have felt like a big investment, but that $1,000/mo fixed payment in 2023 likely feels more like a screaming deal.
The second perspective is the financial return on investing in home ownership versus the stock market.
Home ownership is a big commitment, and it’s right to point out that it’s not people’s only option for investing…or living.
The question could be asked, “What if I chose to rent and not buy, and instead invested my downpayment, closing costs, and monthly savings of renting vs buying into mutual funds in the stock market?"
Financially speaking, which is the better investment?
The breakdown above is perhaps the best I’ve seen, with the Owning column doing its best to fairly factor in all associated costs of buying, owning, and selling a median priced home.
The investment of home ownership is then compared to Class A median rental prices since 2012 in the two rental columns.
The middle column assumes a person can remain super-humanly disciplined and both save AND invest every dollar they retain by renting for less money per month than owning. The far right column is a bit more forgiving and assumes a person only saves 10% of the difference and, like most people, spends the rest of the potential savings…probably on Door Dash and Amazon.
The home ownership column uses the decade’s average home price appreciation rate of 7.4%, while rent prices were calculated at an average rate of 3.6% appreciate, and the S&P “outperformed” both averaging 15.4% returns.
In both situations, home ownership since 2012 has proven to outperform either combination of renting and investing the difference.
Why? How? The stock market got 15.4% returns when home ownership only got 7.4%.
The secret sauce is in the power of leverage - specifically the power of a 30-year mortgage.
In America, people can buy a home while only investing a small percentage of their own money into the purchase up front.
For example:
If someone put down $20,000 as a 10% downpayment on a $200,000 home in 2012, when that home appreciates (goes up in value) by 10%, that homeowner has gained $20,000 in equity, essentially doubling their initial $20,000 investment.
Similarly, had that same person invested their $20,000 in the stock market and gained 10% returns, their investment would have only gained $2,000.
$20,000 > $2,000
This is the power of leverage. Many places in the world don’t offer mortgages in the way the U.S. makes them available, thus making home ownership in the U.S. a unique tool for building personal wealth that can change generations.
** Note: This article is not to say property values always go up or that homeownership comes with zero risk or that investing in the stock market is bad or altogether unwise. The point of this article is to give insight into why home ownership has proven to be an accessible, effective, reliable means of wealth building for many Americans for decade after decade.
First Steps for First Time Buyers
When it comes to buying a home, perhaps you’re afraid you might have champagne taste on a beer budget. In this case, remember that your first home is not your forever home. Shift your focus to finding a home that can make a great long-term rental, so all you might need to do is tolerate living in the home for a few years while you save up for your dream home.
Slow and boring will probably will you the race. The pace of the recent housing market combined with social media algorithms feeding us clips of mountainside swimming pools and roof top parties have unfortunately warped many people’s expectations to view real estate as method to get rich quick. For decades, it was more rightly viewed as a tool for building long term wealth, slowly and reliably. This current market is a bucket of ice water to the face to help people come back to more realistic expectations in line with historical trends.
Even if you’re not looking or able to buy right now, learning the process now is a good idea. We commonly meet with people who are months or years away from buying. In those meetings, we’re able to help remove ambiguity and mystery from the process so that buyers leave with a clear Step 1, Step 2, Step 3 path toward future home ownership. That’s our high trust, low pressure, happy clients for life approach.
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We hope this content serves you well as you seek to be savvy homeowners and make wise financial decisions for your future. If you'd like to chat further or are considering moving in the coming months or year, let's get a meeting scheduled today!
- Josh & The RAGE Team
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
