Rent or Buy? Yes.

$195,400 v. $5,400. That was the average net worth of a homeowner versus that of a renter in 2013 according to the Federal Reserve. That means the average net worth of a homeowner was ~36 times that of the average renter, a multiplier that some expect to increase to ~45 times by 2016. 

Compelling data, but is it a surprise to anyone that homeowners are generally wealthier than renters? Perhaps the more interesting debate is whether home ownership creates wealth or does wealth create home ownership?

The answer is Yes. After all, home ownership rates for those under 25 years of age is generally less than 25% (probably much lower in the Bay Area) and approximately 80% for those ready to retire. Its not rocket science here; younger people will generally have a harder time cobbling together a down payment, and therefore might rent or live with their parents until they accumulate enough wealth over time where owning becomes a viable option.

However, owning a home sooner rather than later can help build wealth too. A mortgage is like a forced savings plan. Every time a homeowner makes a mortgage payment, he/she is likely increasing their equity in the property, and thus contributing to his/her net worth. And of course in times of rising home costs, very few things outside of winning the lottery or owning shares of the next great tech company can build wealth as quickly home ownership. Keep in mind that a 10% increase in home prices may actually translate into a 40-50% increase in equity – that’s called leverage!

Does this mean that everyone that is currently renting should rush out and buy a place? No. No one knows if home prices will continue to rise and for how long and how far. Let’s not also conveniently forget lessons from the last decade; a rise in home prices does not actually mean much unless you sell. And a small drop in home prices can put a disproportionate dent in equity overnight – the flip side of leverage. For those enamored with the age old question of rent or buy from an analytical perspective, I would highly recommend the New York Times Buy v Rent Calculator. Keep in mind that we live in a highly efficient housing market, especially in the Bay Area, and there is probably not any material rent v buy inefficiency to exploit.  But the calculator is at the very least a great exercise in understanding the financial impacts of various costs that go into owning or renting. 

The rent v buy conundrum, for those qualified to do either, remains very much a life-stage or lifestyle choice too often disguised as merely a financial decision. The psychological and emotional commitment required to own is often more burdensome than the financial commitment, and you will be ready when you are ready. For others eager to buy but are not yet qualified, this will make you feel better: you are probably still very young and homeowners are more envious of your youth than you are of their homes or wealth!

While home ownership may not be for everyone, it often depends on timing, taste, and circumstances, there is no denying that real estate remains a great and relatively safe investment, especially over the long term.  As always, if you know of someone ready to buy, sell, or is looking to learn more about the process and prospects of either, I would be honored if you think of me. I would work tirelessly to ensure I exceed the already high expectations that would come from your trusted referral.