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Several real estate economists have shown that the average homeowner
accumulates more overall wealth than the average renter.[i] However, it
is not clear how this is done. Is it that owned property usually
appreciates at such a rate that, after considering leverag, returns to
ownership are extraordinarily high? Said another way, might homeowners
accumulate more overall wealth because ownership is a great levered
equity creator through property appreciation? Or, is it that owners
acquire greater wealth, on average, because they are systematically
paying down a mortgage thereby creating equity thanks to loan
amortization? In other words, paying off property creates wealth.
In ongoing research being conducted by Beracha and Johnson,[ii] these
and other questions concerning homeownership and the accumulation of
wealth are being investigated. In earlier research, Beracha and Johnson
show that renting is the superior investment strategy; however, in this
earlier strict horserace between buying and renting, a very bold
assumption is made. Specifically, it is assumed that any rent savings
(from lower rent versus mortgage payments) are reinvested without fail.
Thereby, after balancing all of the costs and benefits from ownership
and comparing them to rentersâ€™ portfolios from reinvesting rent savings,
The question, however, very quickly becomes that, in a setting where
Americans generally save less than 5% of their disposable income, is
this assumption realistic and how might the removal of this reinvestment
decision alter the outcome of the horserace between buy and renting? As
part of their current research, this question is directly addressed. In
particular, Beracha and Johnson find that after allowing renters to
spend any rent savings on consumption (beer, cookies, healthcare,
education, etc.), ownership leads to greater wealth accumulation, on
average. The graph below highlights this finding.
The graph looks at the ratio of rentersâ€™ portfolio values to ownersâ€™
proceeds from sale for the entire U.S. between 1978 and 2010 both with
strict reinvestment of rent savings and without reinvestment of rent
savings.[iii] Clearly, numbers greater than 1 indicate that renting
leads to greater wealth accumulations, while numbers less than 1
indicate that homeownership creates greater wealth, on average.
When renters are forced to reinvest (top line in the graph), the
results confirm the earlier findings of Beracha and Johnson (2012). That
is, in a strict horserace between buying and renting, renting wins in
the vast majority of cases. However, when renters are allowed to spend
rent savings on consumption (i.e. economically act like the typical
American consumer), homeownership wins in virtually all instances.
Notice that in the bottom line of the graph (no reinvestment), the
rentersâ€™ portfolio values divided by ownersâ€™ sale proceeds is great than
1 for only four of the 32 years of the study. Thus, when renters are
allowed to spend rent savings, homeownership is the clear winner in the
wealth accumulation horserace.
Finally, in the same current research, Beracha and Johnson find that
allowing for property appreciation rates to increase as much as 20% over
their actual historic values results in virtually no change in the
outcomes concerning wealth accumulation. That is, property appreciation
contributes only marginally to wealth accumulation
Without proof many have speculated about this outcome for years.
However, there is now actual quantifiable evidence that homeownership is
not the great levered equity creator that it has so often been touted
to be. Instead, it appears that homeownership creates extra wealth
mainly through its ability to force owners to save rather than through
property appreciation. Thus, homeownership appears to be a self-imposed
savings, which through time leads to greater wealth accumulation as
compared to comparable renters. In short, buying a home makes Americans
Who says that Americans are horrible savers? Apparently, we are not.
We have simply been saving through our homes rather than putting our
savings in the bank.
[i] Homeownership is the most viable path to wealth creation for the
majority of Americans. See Engelhardt (1994), Haurin, Hendershott and
Wachter (1996), and Rohe, Van Zandt and McCarhty (2002), among others.
[ii] Eli Beracha and Ken H. Johnson, 2012, Beer and Cookies Impact on Homeownersâ€™ Wealth Accumulation, ongoing research.
[iii] The research assumes 8-year holding periods. When the holding
period is allowed to vary between four and twelve years, the results
change only marginally. Thus, holding period has very little to do with
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