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Owning vs. Renting: The Pathway to Wealth

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shutterstock_282969065There have been so many articles comparing “owning vs. renting” that a Google search of the phrase yields page after page of results.  Clearly, if you are at a crossroads trying to decide which of the two housing paths to take, there is no shortage of advice and information to guide your thinking.

The Experts Weigh In
Still, we were particularly struck by how forcefully the New York Times weighed-in on the debate.  Late last year, the newspaper’s editorial board felt so strongly about the long-term benefits of owning a home that they published a lengthy opinion on their editorial page which concluded that “as a means to building wealth there is no practical substitute for homeownership.”

More recently, Lawrence Yun writing for this month’s Forbes Magazine, fielded some eye-opening statistics to advance the same argument.  Because he is the chief economist for the National Association of REALTORS®, you would expect Yun to come down on the side of home ownership.  But his dollars-and-cents contrast between the two housing options is so stark and revealing that it should give pause to anyone with the capacity to buy who instead is leaning towards renting.

“The differences between buying and renting are massive,” Yun reports.  “According to the Federal Reserve, a typical homeowner’s net worth was $195,400, while that of a renter was $5,400.”  His point:  Home ownership not only provides a place for your life to unfold, but also forces you to build wealth by simultaneously amassing home equity.  Renting, on the other hand, typically builds wealth only for landlords.

The Time’s editorial also notes that it is hard for most people to save on a regular basis unless obliged to do so.  Taking out a mortgage to purchase a home—as most first-time buyers do—definitely compels them to save; first for the initial down payment, and thereafter for each month’s mortgage payment.

The editorial also says that while renting may offer a more independent, carefree lifestyle, it has practically no potential for building wealth over the long term—unless the renter has enough discipline to regularly invest an amount equal to each month’s rent.

Long-term Benefits
Of course, home values are subject to the same ups and downs and periodic corrections as other classes of investments.  How could we possibly forget the housing bust of a few years ago?    But the depth of that correction—and the fallout that cascaded through the entire economy—had more to do with dubious lending practices that put loans into the hands of people who didn’t qualify.  It did not expose any fundamental flaws in the long-term benefits of owning a home.

Just listed in Lakewood Ranch

Just listed in Lakewood Ranch

As proof, 2015 finds the housing market back on a solid footing, re-anchored by stricter lending practices; and running on all cylinders to satisfy several years of pent-up housing demand.  One need only look at the depleted inventories of residential properties in markets from coast to coast—including ours—to gauge the breadth of housing’s comeback.  Moreover, housing has not only led the nation’s economic comeback but has also reasserted itself as one of the best ways to build wealth over the long term.

Home Values on Florida’s Gulf Coast
Data from Florida Realtors®, the state’s real estate trade association, showed the median sale price for a single-family home hit $250,000 in Sarasota-Manatee during August, up by $44,000—or 21%—over last year.  Similarly, homes in Charlotte County traded for a median of $169,000 in August, up by $30,000—or 22% over last year.

Such large annual jumps in price are neither normal nor sustainable.  In our market’s case, they are the result of unusually high demand bumping up against unusually low inventories of properties.  Once our market settles into a better balance between supply and demand, the region’s customary rate of normal annual appreciation—typically between 3 and 4%—is expected to kick back in.  By anyone’s measure, that is a tidy rate of sustainable annual growth; which over the long term should turn your cozy nest into a comfortable nest egg.

 

Ready to own? Search Manatee, Charlotte, and Sarasota real estate on the Michael Saunders & Company website.

Owning vs. Renting: The Pathway to Wealth was last modified: June 16th, 2016 by Michael Saunders

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