Homeownership: A savings lifeline

Posted by on April 14th, 2017

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

Naysayers bob to the surface with harrowing tales of home-buying gone wrong. If the down payment doesn’t get you – well the property taxes, maintenance and insurance surely will!

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.

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

Though most underwater homeowners have swum back into positive equity, and many of those foreclosures are mortgage-eligible again, the math geeks remain in a feeding frenzy.

The homeowner – they point out – was tied up in an asset that has only doubled in value since 2009, while the stock market  nearly tripled over the same time frame.

While that might be true in terms of raw math, it hides the fact 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.

If a renter spends any “extra” money, rather than investing it, they won’t be building wealth through investment, they’ll be spending money – although that at least might go toward some tangible asset.

None of the naysayers seem to remember the stock market has had its little ups and downs, as well.

For many, many, decades, homes have generally gained value steadily, 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 they can more happily manage 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. In no small part 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. Home ownership 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.