Being back from my very brief holiday respite and having had the chance to recharge my battery, I have to tell you I was really infuriated by all of the cable news stations while trying to relax at home. Their ways of reporting on everything from politics to finances, especially when we get a rare “slow” news day, sometimes is all about the unusual, weird, and often just plain hard-to-believe stories that defy logic. One such story aired on CNBC when it reported on: “Owning a home may help you save some money, but it won’t help you make money and build wealth”.
According to CNBC’s reporting, young people are better off taking control of their finances and renting than buying their home and relying on fluctuating home values based on the research findings of a recent study conducted by Florida Atlantic University, Florida International University and the University of Wyoming.
To my way of thinking that’s a bunch of BS, study or not. While it is certainly very true that young people just out of college and beginning their careers are probably not in a position to buy a home, their goal can and perhaps should be to do so once they are in a better financial place.
Opinions based on this kind of research can be self-fulfilling. Starting with a premise like home ownership, “The American Dream”, won’t build your wealth is akin to saying that not eating is the best way to lose weight or buying a lottery ticket is the best way to become a multi-millionaire! Sure one in a million does it but does that make it the best way and a good option to do it?
Are We Really Fools When We Buy a Home?
To quickly summarize what the report says: buying a home is not as an effective way in building wealth as investing in the stock market is “on average” and we’d all be better off simply renting our homes and using the money we’d “save” for those investments. This message seems to be bolstered by the record breaking bull market over the last several years.
According to the study which gears itself towards recent college grads, co-author Ken Johnson of FAU’s College of Business says: “On average, renting and reinvesting wins in terms of wealth creation regardless of property appreciation”. Again I say don’t be persuaded that this strategy is going to make you wealthy and that home ownership won’t.
Buy or Rent? That is the Question
The question of renting versus buying has always been frequently compared but that has been especially true during the housing market recovery over the past 10 years. 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 let alone fall as far as they actually did. In my own lifetime, from my first house purchase in 1976 until 2009 I never witnessed any period of my own house declining in value.
Despite the fact that the U.S. homeownership rate is still hovering near its record low, buyer demand has been steadily rising. The construction of new homes, however, has not been rising quickly enough to meet that demand and has resulted in fast-rising prices. In the last few years, prices have increased faster than both income and inflation. In some markets, home values have hit record highs, again fueling the debate over which is more lucrative, buying or renting.
Sticker Shock! Have You Checked Out the Actual Cost of Renting?
It is mind blowing for an awful lot of people when they discover the cost of renting a place in 2018. Rents have blown up dramatically as new households are formed and millennials, now the largest generation, struggle to afford renting. While there has been a building boom in luxury rentals that just is not been the case with affordable rental development.
Here in NJ where I live, renting a 1 BR apartment typically runs over $1,000 a month and we are talking small living spaces here of 600-700 SF. That probably seems like a bargain to NYC or San Francisco renters where a small 1 BR often can be double or triple that $1,000 price. Granted, you are probably making a better income if you live in a big city and the market gets what it does because of that for sure, but keep in mind your “higher” salary also goes to the higher cost of living in the big city, for food, clothing, entertainment and everything else you use and need.
But, even given these circumstances, the researchers still claim that the old adage that “renting is just throwing your money away” isn’t true and “your goals are better served by investing and renting rather than owning your home”.
Oh, by the way, never addressed in this study is the aspect of your needed living space if you are a growing family. When you consider family and children, rental and your living expenses of course will absolutely skyrocket!
Why I Say They are Wrong About the Findings
The conclusion that renting and investing builds your wealth and buying a home won’t is faulty and let me tell you why. That is because it assumes that any and all of the extra money a renter saves by not owning a home and not saving up for a down payment will not be simply spent on goods or services and is always invested instead.
They make a false assumption that most all of the monies saved by renting on taxes, utilities, improvements etc. will be invested at a rate of return which wins in terms of wealth creation over owning and appreciation that a house brings over time.
My Personal Wealth Has Grown by Home Ownership
While it’s true that renting can be cheaper than overall expenses of owning a home from month to month, home appreciation was and has been responsible for countless billions and trillions of dollars in wealth accumulated by homeowners since the inception of homeownership. Of course there will be a few blips in that process likes the housing bubble we experienced in 2008-09. It happens. But I can testify that a big portion of my wealth and net worth is in my home now and that “wealth” is growing. I did take a hit in 2008-09, and I did see my net worth decline then but my wealth was founded by my original investment in home ownership from way back in 1976 and I would have considerably less of it if I had simply rented over the past 40 years.
Who Says Renters Will Invest What They Save?
I’m not going out on any limb when I say that many or even most renters will not reinvest those money savings and will instead use it for consumer goods which are the least desirable options in terms of building your personal wealth. Things like cars, furniture, and vacations instantly decline in value and eventually have none. Dining out, attending sporting events, and other such things are expensive and return nothing to your net worth at all. In other words, the rent argument works only if the renter invests the rental savings instead of consuming the money.
To be totally realistic, despite the wild gains in the stock market to its now record levels, investment in stocks and bonds is at the very least as risky as the housing market if not more so. The market drops and rises as a matter of routine and can be affected if someone somewhere “sneezes” these days even though it always has increased over time in the long term just like home ownership does.
Here’s Some Simple Math
If you bought a new home in 1976 (which averaged $48,000) and you still own it today, its now worth about $385,000 and your home has appreciated over 800%. While the market has of course risen from a high 1,004 in 1976 to over 25,000 today, one still has to consider that you have lived for 40 years in your home, had tax advantages, and have earned $300,000 in equity from it. Oh, and by the way, even with the tax law changes, the tax advantages of homeownership which have been around since 1913 will still remain for those who pay interest and real estate taxes (although limited under the new law).
Renting over that same period of time means that each lease period, perhaps every year, you would be subject to rental increases, have no or little tax advantages, and in fact may not have had the space you need for a growing family among other things.
If your initial stock investments were $300 back in 1976, (about 25% of a month’s average salary back then) and you contributed regularly every month to your stock accounts, there is no guarantee that your wealth would have increased as much as home ownership and equity did. In fact, there’s no guarantee it would increase at all. Even when the market is breaking records, some stocks decline and some even cease to exist. Some people really do lose money.
Let’s Get Real Please
When you consider just under half of all Americans are not invested in the stock market, the forced “savings” of a monthly mortgage payment is a key reason why housing has served as an engine of growth for the middle class over the last 70 years.
As long as home values don’t fall and never recover, which has never happened with the glaring exception of the recent recession; homeowners are building a nest egg. They have also been getting tax advantages. That is changing under the new tax plan, which curbs the tax benefits for some. This change may alter the American Dream of home ownership and the building of wealth! It still remains to be seen so stay tuned.
Real estate is a great investment not only living in a home you own but in also being a landlord or investing in real estate-related stocks and commodities. I certainly wouldn’t put all my eggs in any one basket and that includes homeownership and/or investing in the market. A diversified wealth building strategy in them both is my choice and I’m living proof it does work.
What is your experience with homeownership and renting? Do you own or rent? Do you think you would have done better financially or can do better investing and renting rather than buying a home of your own? What is your philosophy on how to build wealth?