The Substantial Effect of Homeownership on Net Worth

The Dramatic Impact of Homeownership on Net Worth

If you're grappling with the decision of renting versus buying a home this year, here's a compelling perspective that might provide the clarity and confidence essential for your choice. The Survey of Consumer Finances (SCF) from the Federal Reserve, released every three years, compares the net worth of homeowners and renters. The most recent report reveals that the average homeowner's net worth is nearly 40 times greater than that of a renter.

 (see graph below):

One reason a wealth gap exists between renters and homeowners is because when you’re a homeowner, your equity grows as your home appreciates in value and you make your mortgage payment each month. When you own a home, your monthly mortgage payment acts like a form of forced savings, which eventually pays off when you decide to sell. As a renter, you’ll never see a financial return on the money you pay out in rent every month. Ksenia Potapov, Economist at First Americanexplains it like this:

“Renters don’t capture the wealth generated by house price appreciation, nor do they benefit from the equity gains generated by monthly mortgage payments . . .”

The Largest Part of Most Homeowner Net Worth Is Their Equity

Home equity does more to build the average household’s wealth than anything else. According to data from First American and the Federal Reserve, this holds true across different income levels (see graph below):

The green segment in each bar represents how much of a homeowner’s net worth comes from their home equity. Based on this data, it’s clear no matter what your income level is, owning a home can really boost your wealth. Nicole Bachaud, Senior Economist at Zillowshares:

“The biggest asset most people are ever going to own is a home. Homeownership is really that financial key that helps unlock stability and wealth preservation across generations.”

If you’re ready to start building your net worth, the current real estate market offers several opportunities you should consider. For example, with mortgage rates trending lower lately, your purchasing power may be higher now than it has been in months. And, with more inventory coming to the market, there are more options for you to consider. A local real estate agent can walk you through the opportunities you have today and guide you through the process of finding your ideal home.

Bottom Line

If you're uncertain about the decision between renting and buying a home, consider that homeownership has the potential to enhance your long-term wealth, irrespective of your income. For further insights into this and numerous other advantages of owning a home, reach out to a local real estate agent.

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