Why Homeowners are Richer Than Renters
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.
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...
