Why Home Ownership Increases Your Wealth
The Great Recession, characterized by devastating mortgage defaults, has challenged the conventional wisdom that homeownership is a good investment. This is particularly true for those with low and moderate incomes. But conventional wisdom on the benefits of owning versus renting still holds true when done right.
According to a study led by the Brown School’s Center for Social Development at Washington University in St. Louis, “Homeowners with low and moderate incomes who participated in a study conducted between 2005-2008 achieved higher net worth than their counterparts who rent.”
The research, published in April 2013 in the journal Housing Policy Debate, documents a study measuring the impact of sustained homeownership on net worth. The study uses data from the Community Advantage Program, which awarded prime mortgages to those who otherwise would only qualify for subprime mortgages.
In addition, a recent study by researchers at the Joint Center for Housing Studies at Harvard University analyzed the reasons for the differing outcomes when owning versus renting a home. Paramount among them is that homeownership requires potential buyers to save for a down payment, and forces them to continue to save by paying down a portion of the mortgage principal each month.
“Our research does not argue that all homeownership is beneficial, but rather that low-income homeowners with mortgages that are carefully underwritten with responsible terms, including low upfront costs and low interest rates, can experience increased financial security and independence,” says Grinstein-Weiss, Associate Professor at the Brown School and Associate Director of the Center for Social Development.
Grinstein-Weiss goes on to say that, even with loans, all homeowners can increase their wealth.“Whereas paying rent guarantees a place to sleep, paying a monthly mortgage eliminates a portion of the principal of the loan, reducing debt and potentially increasing net worth.”
With the right type of loan, even those with relatively few assets can begin to build their wealth.
The security that comes from this increase in wealth may have a great effect on a household’s ability to weather unexpected expenses or loss of income. This reaffirms that homeownership is a path that can lead to economic security.
The New York Times summarizes the debate between ownership versus renting in a succinct and precise manner – “Renting can make sense as a lifestyle choice or because of income constraints. As a means to building wealth, however, there is no practical substitute for homeownership.”
We tend to agree.