Home is where the heart is, but it can also be where the money is. History has consistently shown that owning a home is linked to building wealth, with one study by the Federal Reserve showing that U.S. homeowners have a median net worth more than 40 times greater than renters.* Let’s explore how owning a home can provide a valuable financial safety net.
What is Wealth?
Unfortunately, for most of us, wealth is not a Scrooge-McDuck-style vault of gold coins we can dive into. (Which is okay, because it seems like that would really hurt.) In personal finance, wealth is simply defined as the value of all your assets. To measure it, you start with the market value of all of your physical and financial assets (homes, cars, retirement accounts, bank accounts, etc.) and then subtract all your debts.
In this light, wealth isn’t the privilege of the super-rich … it’s just the financial goal of having more assets than debts. Over the long term, it means accumulating enough assets (wealth) to ensure that you can meet your life goals of education, travel, raising a family, retiring, or any other desire you might have.
So where does homeownership come in?
Building Wealth Starts at Home
Owning a home offers advantages that can help anyone build wealth. Of course, without a crystal ball, it’s impossible to know exactly what your home purchase will do for you long term, but there are some consistent historical indicators of how homeownership relates to wealth.
1. Stable housing payments. Apartment and home rents tend to go up over time, and if you move around a lot, you can’t predict what your housing costs will be down the road. In general, your mortgage payments stay consistent over the life of the loan, although there may be some variations when property tax rates or insurance costs change, or if you enter a new term of an adjustable-rate loan. This predictability helps you know how much you can comfortably invest in other wealth-building vehicles, like a retirement plan.
2. Home appreciation. While the housing market can be unpredictable in the short term, it has historically yielded solid results in the long term. On average, American homes usually double in value every 10 to 20 years, and in some locations, they increase much faster.
3. Tax advantages. If you itemize your taxes, you may be able to deduct the mortgage interest and property taxes you pay (up to a certain limit), as well as private mortgage insurance (PMI). You may also qualify for tax credits if you’re a first-time homebuyer or if you make energy-efficient improvements to your house.
4. A hedge against inflation. In the simplest terms, inflation occurs when the cost of living goes up faster than wages. When inflation goes up, the cost of everything increases — including housing. If you have locked in an interest rate on a home, then you don’t have to worry about rising housing costs, whether that’s in the form of higher rent or increasing home prices. And, since you’re investing money into an asset that typically appreciates over time, you’re putting your money to work for you.
5. Equity. Equity is the difference between what you owe on your house and what it’s worth. We’ve talked about how houses typically appreciate (go up in value) over time, so it stands to reason that as you pay off your mortgage, your equity goes up. This can potentially be a big payoff when you eventually sell your house!
The Big Takeaway
When you combine the advantages above, you can arrive at a common theme that’s also the foundation of financial planning advice: Pay yourself first. Building wealth takes consistent investments over time, and homeownership provides the structure to do just that.
Wondering about more ways owning a home — as a primary residence or an investment property — can help you build wealth? Reach out to us to learn more!
*Survey of Consumer Finances, September 2020