Homeownership has long been associated with the American Dream. 64% of Americans say owning a home is one of their life goals, and 50% say that it is necessary to achieving long-term wealth. At the same time, owning a home is out of reach for a growing percentage of the population. The homeownership rate in the US is now below average when compared to other high-income countries. Unsurprisingly, younger generations, those struggling most to afford housing, are less likely to say homeownership is part of the American Dream.
If we look past our inherent bias and preconceived notions about homeownership, is it actually superior to renting a home? And should it be something every American should strive to achieve?
Homeownership and happiness
Are you typically happier owning a home versus renting? Studies show that the answer is yes, homeownership generally increases life satisfaction, but there are some caveats. Homeowners consistently overestimate how happy buying a home will make them. While homeownership does increase life satisfaction, a study found the increase is significantly less than the anticipated increase in life satisfaction before the purchase was made. In other words, owning a home makes you happier, but not as happy as you’d think. The same study found that this difference in perception and reality is more pronounced among homebuyers who place greater importance on extrinsic goals like income and success.
There are many reasons why homeownership increases life satisfaction. If you are raising a family, ownership is often associated with more space for your children to grow up and play. Owning a home may offer more financial stability. While some costs associated with ownership do increase over time, like property taxes and insurance, mortgage payments are typically a fixed cost every month. There is no landlord to raise your rent. The money spent on housing has a financial benefit, too: building equity in your home, which is one of the primary drivers of wealth accumulation among Americans.
Is home ownership necessary to build wealth?
Half of the population says that owning a home is a requirement to building long-term wealth. That seems plainly incorrect: of course you don’t need to own a home to build wealth. But why do so many Americans think you do?
There is a stark difference in wealth in this country between those who own their home and those who do not, and this gap has only widened in recent years. The net worth of homeowners is 43 times that of renters, with the average homeowner net worth being $430,000 and the average renter net worth at $10,000. We believe homeownership is a requirement to building wealth because the evidence is all around us.
There are many explanations for why the net worth of homeowners is so much greater than that of renters. The first, and most obvious, is home equity. If you own a home for a long period of time, you will accumulate a significant amount of equity in your home, or own it outright, which will naturally increase your net worth. The average net worth of homeowners, $430,000, is pretty close to the average home price of $405,300. If you rent your home, that does not naturally increase your net worth over time.
What else do homeownership and net worth have in common? The higher your income, the easier it is for you to own a home or build your net worth. 35% of Americans that make less than $50,000 own their home, while 85% of Americans that make more than $100,000 own a home. That doesn’t mean that homeownership is required to build wealth, but rather a sizable income is often a requirement of both homeownership and building a significant amount of wealth.
Homeowners tend to be significantly older than renters. The median homeowner is 57.5 years old, while the median renter is 41. This means the median homeowner has had more than 16 extra years to accumulate and build wealth.
The bottom line is that while homeownership does increase your net worth over time, there are other factors at play here: homeowners tend to have higher incomes and are older than renters, which helps explain why there is such a large difference in net worth between the two demographics. Not only do they own homes, they have significantly higher incomes and have had much more time to build wealth.
It should go without saying, but it is possible to build wealth if you rent. It may be a smart decision to rent if you plan on moving frequently or are uncertain about your long-term goals.
So should you buy a home or rent?
If you plan to be in an area for at least five to seven years and the cost of renting and homeownership are equal, owning a home makes a lot of sense. Studies show that homeownership does generally make you happier, although maybe less than expected, and it can be a great way to build wealth. However, renting is often significantly cheaper than owning a home. On average, renters pay $548 less per month than homeowners. If you are able to rent a comparable unit for $548 less, and invest that $548 each month for retirement and earn 8% annually, you would have $816,717 invested after 30 years. Suddenly renting doesn’t sound so bad.
Ultimately, you need to weigh you and your family’s needs with the costs and benefits of owning a home. If you value flexibility, not being responsible for maintenance costs, and a lower cost per month, renting may be the best option for you. If you place greater importance on building equity in a home, more stable housing costs, and potentially more space and privacy than you would have if renting, home ownership might be worth considering. No matter whether you own a home or rent your home, you can be happy and build wealth.
