Since the financial and real estate crisis of 2007-2009, the data shows that fewer people own houses than before, often by choice, and that people are buying their first house at an older age again often by choice.
There are many reasons for this, but one factor that is written about and discussed from time to time is the premise that renting is cheaper than owning a house. While this can be true in the short term for certain markets such as Denver, CO., the data is indisputable that people who own homes are wealthier than renters.
The Numbers Are Eye-Opening
According to the most recent Survey of Consumer Finance which was completed in 2016 by the Federal Reserve Board (the report is completed every three years) here are the findings on wealth:
- In 2016, the median net worth of homeowners in the U.S. was $231,400 (a 15% increase from the last survey in 2013).
- The median net worth of renters in the U.S. was $5,200 (a 5% decrease from the last survey in 2013).
- The median net worth of a homeowner in the U.S. is 45 times greater than the median net worth of a renter in the U.S.
While there may not be a direct cause and effect relationship that entirely explains the disparity (there are undoubtedly other factors), the Survey of Consumer Finance makes clear that there is without a doubt a strong correlation between home ownership and wealth.
It is estimated by the U.S. Census Bureau that that there were approximately 118.3 million households in 2016. This data also showed that 63.4% of the households owned their home and 36.6% rented. (Source: Pew Research analysis of Census Bureau Housing Data, report published July 19, 2017 based on 2016 data).
- While approximately 65% of the households headed by someone under 35 rented; Almost 35% owned;
- More telling is the fact that 41% of the households headed by someone between the ages of 35 to 44 rented; and
- Approximately 20% of the households headed by someone between 45 and 60 rented.Often people try to explain the disparity in net worth between renters and homeowners by stating that only young people rent and older people own homes. Again, while a factor, this reason does not account for the large disparity in net worth given the high numbers of renters across all age groups and the relatively strong homeownership number for those under 35.
What Accounts for the Disparity?
- Simply put, homeownership is a form of ‘forced savings’. Every time you pay your mortgage you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.
- Homeowners are the beneficiaries of 100% of their home’s appreciation. In Colorado, homes have appreciated 366% since 1991, which is the second highest number for any state in country during that period. Renters experience no appreciation.
- The monthly cost of having a mortgage is fixed (i.e. it does not rise), which supports financial stability. A renter is subject to annual rent increases that have averaged between 5% to 10% in the Metro Denver area over the last 10 years. From 2010 through 2017, rents have increased 48% in the Metro Denver area. With wages rising at a much slower pace, renters lose purchasing power every year and are in a worse financial position every year.
- To the extent that rent payments may be less than a mortgage payment in the early years, most renters do not invest the difference and they spend it on other items, so the opportunity for investment returns on any savings is lost.
- Homeowners receive preferential tax treatment under the Internal Revenue Code with many of the costs of homeownership being deductible. None of the costs of renting are deductible.
- The ability to convert equity into cash in order to meet other financial objectives. No such option exists for renters.
We often hear people wonder out loud if “now is a good time to buy” or “if there is a real estate bubble that is ready to pop.” The simple reality is that over time home values have appreciated substantially, especially in Colorado. This is anticipated to continue with Colorado’s population projected to continue to increase due to the strong economy and a desirable lifestyle for many. Given the lack of building and the desire of most people to live close to centers of employment, prices will continue to go up simply due to supply and demand.
Until there is a recession or economic slowdown that impacts the local economy in a meaningful way, Colorado will not experience a decline in prices and will likely continue to experience appreciation although not likely at the levels seen since 1991. But who would have thought my first house that was purchased in 1992 for $88,000 would today be worth between $400,000 and $425,000?
Nationwide, the housing prices have increase 161% since 1991. In Colorado housing prices have increased 366%, which is second only in the country to District of Columbia. (Source: Federal Housing Finance Agency (FHFA), House Price Index, November 27, 2018). Since the recession of 2008 and 2009, the net worth of homeowners has continued to increase, while the net worth of renters has declined during the same time period.While it is clear not everyone can or should buy a home and there are situations where it does make financial sense to rent for some, period. However, for those whose financial situation and current goals support taking on the financial obligation of homeownership, it is well worth it.