Home Ownership and Wealth

I’ve read multiple articles lately on millennials deciding to rent instead of buying homes more so than previous generations. These articles span from last month to six years ago and list a host of reasons ranging from high student loan debt (although research actually shows that people with higher debt amounts actually buy sooner), waiting later in life to start a family, desire for flexibility to move areas/cities quickly, to not wanting to deal with repairs. I personally have helped a lot of millennials buy homes and so this may just be media buzz but it got me thinking about why anyone would or would not buy a home. I understand wanting flexibility, not wanting to deal with home maintenance, and of course if you don’t actually qualify to buy a home. But, one thing that struck me as I read through these articles was no one mentioned homeownership as the major way that most Americans throughout the last century have accumulated wealth.

Until FDR and the New Deal in the 1930’s, if you owned your own home it was likely because you were very wealthy or came from a wealthy family or you had built the home yourself over time. There was no such thing as a 30 year amortized loan. The founding of the FHA was the beginning of what we now know as the mortgage industry. This allowed normal people to start building equity (actual ownership and cash value) in a home instead of using the same money to pay rent their whole lives. Equity meant you could leave something for your children or leverage that to cover other costs such as a bigger home or college tuition. Equity meant that eventually you would truly own your home and not have to have a rent payment your whole life. When your house was payed off, that monthly payment could then be used for other things like retirement or vacations. Once you throw in inflation (rent prices go up) and appreciation (housing values go up) and home ownership seems like a no brainer.

I would be remiss if I failed to mention that home ownership wasn’t that easy for everyone (i.e. was out of reach, unattainable). Things like redlining and discriminatory practices kept many minorities from being able to purchase homes. Fast forward to the Great Recession and over 6 million people lost their homes to foreclosure. I can understand why millennials might not think of home ownership as a way to build wealth. We have seen record housing price increases in the past two years. Is this just going to be another bubble and does anyone really have equity in their home?

I would argue that owning real property with a mortgage payment that you can afford that isn’t going to have a balloon payment (a huge chunk of the loan due at one time) or other predatory lending practices will help you build wealth. My clients that bought their first home anywhere between 2013 to 2019, were able to sell that first home and use the equity they built to buy their next home (normally bigger or in a better area) with a similar house payment. If they had just rented all that time, they would not have been able to afford the second home they bought. One day you will pay off your house and no longer have a huge chunk of your monthly income go towards housing costs. And, if you want the flexibility to move to bigger cities, I’ve been telling clients for years to go ahead and buy here. If you do move, you can rent our your house here (there is always a demand and most likely the rental income will more than cover your expenses) and you can rent in the new city where buying a home might be less affordable.