Is Buying a Home an effective way to build wealth?

In a previous blog I wrote an article “Why Should You Buy a House.” I pointed out that “recent statistics from the Federal Reserve show the median net worth of homeowners is $234,000, and for renters it is $5,100” and that “buying a house may be like a forced savings plan, where you can not only shelter your money and your family, but also build up your net worth.”Equity, the value of a mortgaged property minus the amount owed, is increased by paying the principal portion of the monthly mortgage payment and also through any increase in the home’s value over time.  As a homeowner makes their mortgage payment, they mortgage amount decreases and they own an increasing percentage of their home’s total value, which increases their net worth. And, even though homeowner equity is closely tied to home values, homeowners’ net worth still dwarfed that of renters even following the housing crash, when home prices plummeted. In fact, homeowner net worth was 34 times that of the typical renter’s in 2010, despite the housing market’s struggles. 

As we have noticed in the Salt Lake market, the real estate market has not only caught up with the price levels of 2007, but has surpassed those levels in only 7 years. Harvard’s Joint Center for Housing Studies recently released the advice that “though not without risk – (Homeownership) is an effective way to build individual wealth.” After home values tumbled in our Great Recession, more than 9 million borrowers lost their homes to foreclosure. But as pointed out by Stephen F Lovell, the Director of Regional Economics and Housing Finance Policy for the National Association of Realtors, nearly a million of those former owners have returned to the market and many more of those “return buyers” are  qualified, and wanting to return to the market. 

As I noted in my previous blog, homeowners are basically in a forced saving program and by paying their mortgage payments they pay down an increasing amount of their mortgage principal each month, which over time gives an increasing percentage of ownership. Additionally, homeowners have the opportunity to gain wealth through the appreciation in the value of their home, along with the additional tax benefits and deductions that homeowners are given.  Enjoying the deduction benefits of mortgage interest and property taxes can be particularly beneficial depending on a homeowner’s marginal tax rate, which typically range from 15 to 39 percent. And when you sell your home, if you have resided in it for two of the previous five years, you are excluded from the capital gains tax (currently at 15 percent for most taxpayers) if the gain is less than $250,000 for single personas and less than $500,000 for married persons filing joint returns. 

The reason for these tax benefits is that our government has long recognized the importance homeownership as a means of building assets, and as being important in the well-being of our population. Increased family assets enables folks to invest in things like education for themselves or their family, or maybe in a business, which can provide the family greater economic security, and also can pass advantages on to their children. 

Another important benefit in homeownership, is that owning a home is a hedge against inflation over time.  Mortgage payments seem to decline in real terms over time. In my previous article, I gave the example of my first home purchase in Sandy in 1971 for $17,500 and I had monthly payments of $156 per month. You would not believe the stress that caused me – it seemed like a huge amount, but as time went on, that $156 payment seemed easy. Whereas, had I been renting, my monthly housing payments would have more likely kept pace with inflation. 

In summation, as housing prices rise and our economy improves, there will be increasing desires to participate in homeownership. As the advice that I gave in my previous blog, “does that mean you should go out and purchase a home that would be a real financial stretch. I don’t think so. My advice is to not put yourself in financial stress – purchase a modest home with payments about what you would pay if you would pay if you were renting. Try to stay conservative, and realize that there’s always risk to any investment – but it may be better to have an investment, rather than no investment, as a renter.”