Eli Beracha is an associate professor at Florida International University. He is coauthor of "A Revision of the American Dream of Home Ownership" published in the Journal of Housing Research.
TAKE OUR QUIZ: How Smart of a Home Buyer Are You?
Why do homeowners accumulate more wealth than renters? Homeowners must make a substantial down payment when they buy and a mortgage payment every month. Part of every payment goes to pay loan principal, so that's like having a mandatory savings account. Plus, they've purchased an asset that, on average, they hold for a long period. None of those actions represents the best way to accumulate wealth, but together they are better than doing nothing. Most renters spend the difference between renting and owning a home on other things. So, for the average American, it's better to own, even with the changes to the tax law (see 26 Ways the New Tax Law Will Affect Your Wallet).
How does home-price appreciation compare with the return from investing in stocks and bonds over time? People believe that home-price appreciation in the U.S. is much higher than it really is. Over the long run, it exceeds inflation by about one-quarter to one-half of a percentage point per year. Increases in home prices and inflation must, by definition, be similar because housing is the biggest component in how the Federal Reserve calculates inflation. But stocks historically have returned an annual average of five to six percentage points more than inflation. Of course, you can't live in a stock, so it isn't fair to compare price appreciation of homes with the return on stocks.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Homeowners also underestimate the cost of ownership. They overlook how much they pay for expenses such as maintenance and closing and selling costs, and they don't value their time and effort.
So what must renters do to accumulate as much wealth as homeowners? We found that renters could, on average, accumulate more wealth than homeowners if they saved and invested the equivalent of a down payment, plus the difference between a monthly mortgage payment and rent, in a diversified portfolio of stocks and bonds. But the reality is, they don't.
-
Stock Market Today: Stocks Close Mixed Amid War Angst, Nvidia AnxietyMarkets went into risk-off mode amid rising geopolitical tensions and high anxiety ahead of bellwether Nvidia's earnings report.
-
What the Comcast Cable Spinoff Means for InvestorsComcast has announced plans to spin off select cable networks and digital assets into a separate publicly traded company. Here's what you need to know.
-
October CPI Report Hits the Mark: What the Experts Are Saying About InflationCPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are SayingFederal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
-
New 2025 Child Tax Credit Announced: How Much Is It?Family Tax Credits Explore the new IRS-adjusted amounts for popular family tax credits.
-
CPI Report Points to Gradual Pace for Rate Cuts: What the Experts Are Saying
CPI Inflation surprised to the upside last month but the disinflation trend remains on track.
-
Strong September Jobs Report Puts Soft Landing in Sight: What the Experts Are SayingJobs Report A blowout reading on nonfarm payrolls takes another jumbo-sized cut to interest rates off the table.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
