Posted: 24 Jun 2015 04:00 AM PDT
There has been recent press regarding whether or not it makes better financial sense to rent rather than buy in todayâ€™s housing market. As an example, the recently released June Summary of the BH&J Buy vs. Rent Index reported:
The Concept of â€˜Forced Savingsâ€™ and Wealth Accumulation
Many believe the wealth accumulation of homeowners is tied into the concept of â€œforced savingsâ€. The New York Times late last year published an editorial entitled, â€œHomeownership and Wealth Creation, which discussed this concept. The article explained:
â€œHomeownership 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.â€ â€œEven in instances where renters have excess cash, saving a substantial amount is difficult without a near-term goal, like a down payment. It is also difficult to systematically invest each month in stocks, bonds or other assets without being compelled to do so.â€
Many of the points that were made in the article are on track with the research done by the Joint Center for Housing Studies at Harvard University which agrees that â€œforced savingsâ€ is a major advantage of homeownership. In a paper, The Dream Lives On: the Future of Homeownership in America, they concluded:
â€œSince many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome peopleâ€™s tendency to defer savings to another day.â€
The Truth is in the Historical Data
Edwards Deming once said: â€œWithout data, youâ€™re just another person with an opinion.â€ Letâ€™s look at the data on this subject. The Federal Reserve has conducted a study titled: Survey of Consumer Finances. The study found that the average net worth of a homeowner ($194,500) is 36 times greater than that of a renter ($5,400).
The New York Times editorial articulated it best:
â€œHomeownership long has been central to Americansâ€™ ability to amass wealth; even with the substantial decline in wealth after the housing bust, the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little if any wealthâ€¦As a means to building wealth, there is no practical substitute for homeownership.â€
If you are a renter who is considering making a purchase, sit with a local real estate professional who can explain the benefits of signing a contract to purchase over renewing your lease!