It's NOT Just About Money
The “numbers tell the story” examples should ease your mind about the financial aspects of becoming a homeowner. But there are other, non-financial benefits to homeownership that may partially explain the fact that buyers buy when they are ready. Several research studies indicate that homeownership adds to the value of communities, has positive effects on children, and even contributes to increased voter participation rates.
The American Dream
More than two thirds of American households own their home. They know the benefits of homeownership, from the accumulation of home equity, other financial benefits, and the pride of owning a place of their own. They also had to take that first step of deciding “I’m ready to be a homeowner.” REALTORS· assisted many of today’s 75 million homeowners in both their decision to buy and their first home purchase. REALTORS” are real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS· and who abide by the Association’s strict Code of Ethics and Standards of Practice. They can help guide you to first-time homebuyer programs in your area, as well as assist you in searching for and buying your home.
Rents Increase Over Time
Over the past ten years, the cost of rental housing in the U.S. has increased an average of 2.7% per year. If that trend continues, that means that an apartment or home renting for $1,000 per month will cost more than $1,270 a month in ten years. If you rent the same home for ten years, the total amount you would pay for rent will equal $135,681 !
Owning Can Lead to Tax Savings
None of that $135,681 is returned to you, either through savings or as an investment. Homeownership, on the other hand, often has tax advantages over renting a home, and those advantages can help you save money. For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings.
Example of Ownership
You purchase a home that costs $200,000. Your downpayment is $10,000 (plus closing costs – expenses incurred to actually process the transaction). You finance the balance with a 30-year fixed rate mortgage at 3.5 percent interest. Your monthly payments (not including utilities, maintenance, insurance, etc.) are:
Owning your home reduces your federal income tax bill by $189 a month. In addition, as you pay down your mortgage loan, your equity – the wealth you have in your home – increases. If home prices rise, the equity you have in your home increases, too.
As an example, let’s look again at that $200,000 home. Unlike your rental unit, your home usually appreciates over time. Instead of assuming average growth, we assume that prices are flat in the first year of ownership and pick up, but only slightly, in the second year. In the third year of ownership, your home has appreciated to a modest $213,180. After ten years, assuming a return to an average 4.5 percent appreciation rate’, your $200,000 home will be worth $290,109. Not only do you earn a rate of return on your original purchase price, you also get a return on any subsequent appreciation.
*Average annual price appreciation in the fast 40 years was 4.9%.
Homeownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2010. In 2010, the median net worth for homeowners was $174,500 compared to $5,100 for renters. Even after house price declines have narrowed the differential between homeowners and renters, typical homeowners still have more than 34 times greater net worth than typical renters. How do you build up your net worth? As a homeowner, you build wealth in two ways: through paying down the prinCiple on your mortgage and through those “appreciating returns” on your home.
We’ve already seen how your $200,000 home could be worth $290,109 in ten years. In addition, you are paying down the prinCipal on your mortgage. Remember that $200,000 you borrowed at 3.5 percent over 30 years – that debt amount is decreasing every month and every year as you make payments.
After the first year, you now only owe $186,354 on a home that is worth $200,000. As home price growth returns to a normal level the amount of wealth that you net from appreciation will increase. At the same time, mortgage payments reduce your outstanding debt. As your debt decreases and the home value increases, you accumulate wealth from the value of your home. In addition, over this ten-year period, you will have a significantly lower after-tax payment for housing. Each year as your home appreciates and you continue to pay down your mortgage debt, you increase your own net worth.
Buyers Usually Come Out Ahead
Given that price growth has recently deviated from its usual pattern of increase, the table on the next panel considers four different price growth scenarios, including a loss. You may be surprised to see that the homeowner still comes out ahead of the renter even if there is a small decline in the home’s value over the next year. Favorable interest rates and lower prices have ushered in some of the best affordability conditions in a generation, and recently, prices have resumed a more normal rate of increase.