If the new year has you thinking about a new home, one question you may have considered is whether to buy or rent. And, you may be wondering, does buying really provide more financial stability than renting? Let’s take a look at what a recent survey revealed.
The Survey of Consumer Finances (SCF)
Every three years, the Federal Reserve Board shares a report called the Survey of Consumer Finances (SCF). The latest report was released in the fall of 2023 and provides a comprehensive snapshot of household finances across the United States.
One of the key insights from the report is the significant wealth gap between homeowners and renters. The latest report revealed that on average, the net worth of homeowners is nearly 40 times higher than that of renters.
Key Findings from the Survey of Consumer Finances (SCF)
Average Net Worth Comparison:
Homeowners: According to the SCF, the median net worth of homeowners is approximately $255,000.
Renters: In contrast, renters have a median net worth of about $6,300.
Wealth Growth Over Time:
Homeowners tend to see their wealth grow steadily over time, benefiting from property value appreciation and equity accumulation.
Renters, on the other hand, often lack significant asset growth, as their monthly housing payments do not contribute to wealth building.
Income and Savings Disparities:
Homeowners typically have higher incomes than renters, enabling them to save and invest more.
Renters are more likely to allocate a higher percentage of their income to housing costs, leaving less room for savings.
Key Factors for Wealth Gap Between Renters and Homeowners
The wealth gap between homeowners and renters stems from several factors, including:
Home Equity as a Wealth-Building Tool:
A significant portion of a homeowner’s net worth comes from home equity. As they pay down their mortgage, they accumulate ownership in a valuable asset.
Over time, real estate values tend to appreciate, further increasing the homeowner’s wealth.
Forced Savings Mechanism:
Mortgage payments include both interest and principal. The principal portion acts as a form of forced savings, ensuring that homeowners build equity with each payment.
Renters, however, do not benefit from this mechanism, as their monthly rent payments contribute solely to their landlord’s wealth.
Tax Advantages:
Homeowners often benefit from tax deductions, such as mortgage interest and property tax deductions, which can reduce their overall tax burden.
These financial incentives make homeownership more cost-effective over time compared to renting.
Appreciation in Property Values:
Real estate historically appreciates over the long term. Homeowners who hold onto their properties for extended periods often see significant gains in their investment.
Renters do not have access to this type of asset appreciation.
Stability and Long-Term Planning:
Homeownership provides financial stability, as fixed-rate mortgages ensure predictable housing costs over time.
Renters, on the other hand, are subject to market fluctuations and rising rents, which can hinder their ability to save and invest.
Intergenerational Wealth Transfer:
Homes are often passed down to the next generation, providing a head start in wealth accumulation for heirs.
Renters typically do not have comparable assets to transfer to future generations.
Learn More: 3 Rent Vs Own Myths Debunked
Renting vs. Buying a Home: Final Thoughts
The Survey of Consumer Finances illustrates how homeownership serves as a pathway to financial security and long-term wealth, thanks to things like equity building, property appreciation, and tax advantages.
Overcoming the barriers to homeownership may seem challenging, but doing so could provide a transformative opportunity to build wealth and achieve financial stability. It’s true that becoming a homeowner requires discipline and planning, but you may be closer to homeownership than you think, with the help of loan programs for low credit, MSHDA down-payment assistance and even zero down loans.
Not sure if you qualify for a loan? Simply consulting with an experienced lender can help you know exactly where you stand and what steps to take. You may learn of programs available that you had no idea existed, or find your financial picture is much better than you estimated. The key is getting the right information from a mortgage professional.
Michigan Mortgage Lender, Julie Krumholz from Superior National Bank
With over 35 years of experience in the mortgage industry, Julie Krumholz from Superior National Bank is a trusted resource and friend to homebuyers. Julie has worked in processing, closing, loan origination, underwriting, and QC auditing and has even co-owned a mortgage brokerage firm. Julie applies her knowledge to help first-time and seasoned homebuyers with a seamless homebuying experience.
