Is your ticket to wealth a win on a lottery scratcher? It could be or it could be a lot less dependent on chance.
Believe it or not something as mundane as buying a house plays a significantly role in building a person’s financial net worth. In fact, the average homeowner’s lifetime net worth was approximately 36x than of a renter according to the 2014 Federal Reserve’s Survey of Consumer Finances. To look at it in terms of numbers, a homeowner’s net worth was $195,400 compared to that of the average renter at $5,400. Lawrence Yun, Chief Economist for the National Association of Realtors predicts that homeowner wealth will increase to 45x that of the average renter over the course of a lifetime. In California, these numbers can be much greater.
It’s true that there are many financial vehicles to build wealth. You could invest in the stock market, start a business, and even make regular investments in your company 401k. Each of these provides upside opportunity as well as risk. Buying a home takes money that you presumably are paying already as a renter and applies it slowly and steadily to pay off a mortgage. This forced investment/savings plan puts the average homeowner on a path to increased ownership over the course of time which is typically by means of a 30-year fixed rate mortgage. Not only do you pay down the loan and increase your equity stake, the real estate market goes up over time and price appreciation works to compound your ownership rate.
While you may not live in your home for 30 years, the equity acquired through monthly payments on your mortgage and an average 6% price appreciation year over year allows homeowners to sell their home for a profit and apply the proceeds to a larger home as the family grows. Or for those nearing retirement, a goal, that seems to have been lost recently, is to have your mortgage paid off so that you aren’t paying a housing payment at all. The benefit is that your cost of living will go down when your income is fixed. You’ll still be paying fire insurance and property tax, but that’s usually going to be less than a rental payment.
The recent recession reminds us that Sacramento real estate doesn’t always go up every year. But homeowners who were able to hang onto their properties, eventually saw their homes return to that 6% year over year price appreciation from pre-recession and are now in a position to have significant equity again. Renters on the other hand basically paid their landlord’s mortgage and have no equity to show for it.
Homeownership doesn’t come without its own set of risks. According to Zillow in their recent Housing Trends Report, homeownership remains a conduit for wealth in the U.S., but it can also be a financial burden, as families stretch their finances to afford the space they need, and large, dated homes owned by Baby Boomers and the Silent Generation demand maintenance and improvements. Additionally, if moving is necessary when the market is down, there might not be equity to cash out. In cases such as this, many homeowners rented their homes out until the market came back and many have recently sold with solid gains.
We’re observing a positive trend with millennials starting to increase their homeownership rate. Interestingly, millennials represent half of all homebuyers according to Zillow! Others, who due to factors such as divorce, bankruptcy, short sale, or other unfortunate circumstances, are coming back to homeownership at varying rates though they often need the assistance of a reputable lender to help them get credit in shape to qualify. If you need help, reach out and I can provide you with a couple trustworthy individuals.
Did I miss anything? What do you think? Feel free to leave a comment!